Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ningbo Yongxin Optics Co.,Ltd (SHSE:603297) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ningbo Yongxin OpticsLtd

How Much Debt Does Ningbo Yongxin OpticsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Ningbo Yongxin OpticsLtd had CN¥140.1m of debt, an increase on CN¥80.2m, over one year. However, its balance sheet shows it holds CN¥985.4m in cash, so it actually has CN¥845.3m net cash.

How Strong Is Ningbo Yongxin OpticsLtd's Balance Sheet?

According to the last reported balance sheet, Ningbo Yongxin OpticsLtd had liabilities of CN¥359.5m due within 12 months, and liabilities of CN¥13.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥985.4m as well as receivables valued at CN¥218.6m due within 12 months. So it actually has CN¥831.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Ningbo Yongxin OpticsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ningbo Yongxin OpticsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Ningbo Yongxin OpticsLtd grew its EBIT by 2.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ningbo Yongxin OpticsLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ningbo Yongxin OpticsLtd 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. Over the most recent three years, Ningbo Yongxin OpticsLtd recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ningbo Yongxin OpticsLtd has CN¥845.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥142m, being 67% of its EBIT. So is Ningbo Yongxin OpticsLtd's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 3 warning signs for Ningbo Yongxin OpticsLtd that you should be aware of.

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.