Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ningbo BaoSi Energy Equipment Co., Ltd. (SZSE:300441) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Ningbo BaoSi Energy Equipment's Debt?
You can click the graphic below for the historical numbers, but it shows that Ningbo BaoSi Energy Equipment had CN¥119.6m of debt in September 2024, down from CN¥482.7m, one year before. But on the other hand it also has CN¥554.8m in cash, leading to a CN¥435.2m net cash position.
How Healthy Is Ningbo BaoSi Energy Equipment's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ningbo BaoSi Energy Equipment had liabilities of CN¥680.1m due within 12 months and liabilities of CN¥186.9m due beyond that. On the other hand, it had cash of CN¥554.8m and CN¥714.2m worth of receivables due within a year. So it can boast CN¥402.0m more liquid assets than total liabilities.
This surplus suggests that Ningbo BaoSi Energy Equipment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ningbo BaoSi Energy Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Ningbo BaoSi Energy Equipment has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ningbo BaoSi Energy Equipment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ningbo BaoSi Energy Equipment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Ningbo BaoSi Energy Equipment saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Ningbo BaoSi Energy Equipment has CN¥435.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 60% year-on-year EBIT growth. So we are not troubled with Ningbo BaoSi Energy Equipment's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Ningbo BaoSi Energy Equipment (including 2 which are a bit concerning) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
