Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Ningbo Peacebird Fashion Co.,Ltd. (SHSE:603877) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Ningbo Peacebird FashionLtd Carry?

The chart below, which you can click on for greater detail, shows that Ningbo Peacebird FashionLtd had CN¥798.0m in debt in September 2024; about the same as the year before. But it also has CN¥1.82b in cash to offset that, meaning it has CN¥1.02b net cash.

How Strong Is Ningbo Peacebird FashionLtd's Balance Sheet?

According to the last reported balance sheet, Ningbo Peacebird FashionLtd had liabilities of CN¥2.15b due within 12 months, and liabilities of CN¥1.35b due beyond 12 months. Offsetting this, it had CN¥1.82b in cash and CN¥640.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.04b.

Of course, Ningbo Peacebird FashionLtd has a market capitalization of CN¥6.73b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Ningbo Peacebird FashionLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Ningbo Peacebird FashionLtd grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. 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 Peacebird FashionLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ningbo Peacebird FashionLtd 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 Peacebird FashionLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Ningbo Peacebird FashionLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.02b. And it impressed us with free cash flow of CN¥582m, being 284% of its EBIT. So we don't think Ningbo Peacebird FashionLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Ningbo Peacebird FashionLtd .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.