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 note that Ronglian Group Ltd. (SZSE:002642) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Ronglian Group
What Is Ronglian Group's Net Debt?
The chart below, which you can click on for greater detail, shows that Ronglian Group had CN¥317.6m in debt in September 2023; about the same as the year before. However, it does have CN¥424.3m in cash offsetting this, leading to net cash of CN¥106.7m.
How Healthy Is Ronglian Group's Balance Sheet?
According to the last reported balance sheet, Ronglian Group had liabilities of CN¥1.35b due within 12 months, and liabilities of CN¥20.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥424.3m as well as receivables valued at CN¥966.4m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Ronglian Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.11b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Ronglian Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ronglian Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Ronglian Group had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥3.0b. To be frank that doesn't bode well.
So How Risky Is Ronglian Group?
While Ronglian Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥184m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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. Be aware that Ronglian Group is showing 1 warning sign in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.