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.' 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 NanJing AoLian AE&EA Co.,Ltd (SZSE:300585) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for NanJing AoLian AE&EALtd
How Much Debt Does NanJing AoLian AE&EALtd Carry?
You can click the graphic below for the historical numbers, but it shows that NanJing AoLian AE&EALtd had CN¥39.9m of debt in September 2022, down from CN¥45.0m, one year before. However, it does have CN¥156.2m in cash offsetting this, leading to net cash of CN¥116.3m.
A Look At NanJing AoLian AE&EALtd's Liabilities
The latest balance sheet data shows that NanJing AoLian AE&EALtd had liabilities of CN¥202.3m due within a year, and liabilities of CN¥10.2m falling due after that. Offsetting this, it had CN¥156.2m in cash and CN¥221.2m in receivables that were due within 12 months. So it can boast CN¥165.0m more liquid assets than total liabilities.
This surplus suggests that NanJing AoLian AE&EALtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NanJing AoLian AE&EALtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is NanJing AoLian AE&EALtd'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.
In the last year NanJing AoLian AE&EALtd had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥376m. We would much prefer see growth.
So How Risky Is NanJing AoLian AE&EALtd?
Although NanJing AoLian AE&EALtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥24m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for NanJing AoLian AE&EALtd (of which 2 shouldn't be ignored!) you should know about.
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.