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 Cixing Co.,Ltd. (SZSE:300307) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Ningbo CixingLtd's Debt?

As you can see below, Ningbo CixingLtd had CN¥513.6m of debt at September 2023, down from CN¥535.6m a year prior. However, it does have CN¥833.9m in cash offsetting this, leading to net cash of CN¥320.3m.

How Healthy Is Ningbo CixingLtd's Balance Sheet?

According to the last reported balance sheet, Ningbo CixingLtd had liabilities of CN¥1.77b due within 12 months, and liabilities of CN¥26.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥833.9m as well as receivables valued at CN¥1.27b due within 12 months. So it can boast CN¥303.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Ningbo CixingLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ningbo CixingLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Ningbo CixingLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥93m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ningbo CixingLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ningbo CixingLtd 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. Happily for any shareholders, Ningbo CixingLtd actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningbo CixingLtd has net cash of CN¥320.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥154m, being 166% of its EBIT. So we don't think Ningbo CixingLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Ningbo CixingLtd has 1 warning sign we think you should be aware of.

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.