The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that NanJing AoLian AE&EA Co.,Ltd (SZSE:300585) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for NanJing AoLian AE&EALtd
What Is NanJing AoLian AE&EALtd's Debt?
The chart below, which you can click on for greater detail, shows that NanJing AoLian AE&EALtd had CN¥20.0m in debt in March 2023; about the same as the year before. However, its balance sheet shows it holds CN¥58.9m in cash, so it actually has CN¥38.9m net cash.
A Look At NanJing AoLian AE&EALtd's Liabilities
Zooming in on the latest balance sheet data, we can see that NanJing AoLian AE&EALtd had liabilities of CN¥179.0m due within 12 months and liabilities of CN¥13.8m due beyond that. Offsetting these obligations, it had cash of CN¥58.9m as well as receivables valued at CN¥259.7m due within 12 months. So it actually has CN¥125.8m 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, NanJing AoLian AE&EALtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
So How Risky Is NanJing AoLian AE&EALtd?
While NanJing AoLian AE&EALtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥19m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 3 warning signs with NanJing AoLian AE&EALtd (at least 1 which is concerning) , and understanding them should be part of your investment process.
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.