David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Nanjing Quanxin Cable Technology Co., Ltd. (SZSE:300447) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Nanjing Quanxin Cable Technology's Net Debt?
The chart below, which you can click on for greater detail, shows that Nanjing Quanxin Cable Technology had CN¥49.2m in debt in September 2024; about the same as the year before. However, it does have CN¥132.6m in cash offsetting this, leading to net cash of CN¥83.4m.
How Healthy Is Nanjing Quanxin Cable Technology's Balance Sheet?
We can see from the most recent balance sheet that Nanjing Quanxin Cable Technology had liabilities of CN¥633.5m falling due within a year, and liabilities of CN¥20.0m due beyond that. Offsetting this, it had CN¥132.6m in cash and CN¥1.34b in receivables that were due within 12 months. So it can boast CN¥823.1m more liquid assets than total liabilities.
This surplus suggests that Nanjing Quanxin Cable Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Nanjing Quanxin Cable Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Nanjing Quanxin Cable Technology if management cannot prevent a repeat of the 46% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nanjing Quanxin Cable Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nanjing Quanxin Cable Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Nanjing Quanxin Cable Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Nanjing Quanxin Cable Technology has net cash of CN¥83.4m, as well as more liquid assets than liabilities. So we are not troubled with Nanjing Quanxin Cable Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Nanjing Quanxin Cable Technology that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
