Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 RongFa Nuclear Equipment Co., Ltd. (SZSE:002366) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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 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.
Check out our latest analysis for RongFa Nuclear Equipment
How Much Debt Does RongFa Nuclear Equipment Carry?
You can click the graphic below for the historical numbers, but it shows that RongFa Nuclear Equipment had CN¥77.5m of debt in September 2023, down from CN¥1.34b, one year before. But it also has CN¥1.43b in cash to offset that, meaning it has CN¥1.35b net cash.
How Strong Is RongFa Nuclear Equipment's Balance Sheet?
According to the last reported balance sheet, RongFa Nuclear Equipment had liabilities of CN¥1.37b due within 12 months, and liabilities of CN¥390.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.43b as well as receivables valued at CN¥1.63b due within 12 months. So it actually has CN¥1.30b more liquid assets than total liabilities.
This surplus suggests that RongFa Nuclear Equipment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, RongFa Nuclear Equipment 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 it is RongFa Nuclear Equipment'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.
In the last year RongFa Nuclear Equipment wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to CN¥651m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is RongFa Nuclear Equipment?
Although RongFa Nuclear Equipment had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥533m. 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. Keeping in mind its 59% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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 2 warning signs for RongFa Nuclear Equipment you should know about.
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.