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.' 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 NARI Technology Co., Ltd. (SHSE:600406) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for NARI Technology

What Is NARI Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NARI Technology had CN¥500.5m of debt in September 2023, down from CN¥1.37b, one year before. But on the other hand it also has CN¥13.8b in cash, leading to a CN¥13.3b net cash position.

How Healthy Is NARI Technology's Balance Sheet?

We can see from the most recent balance sheet that NARI Technology had liabilities of CN¥28.6b falling due within a year, and liabilities of CN¥581.8m due beyond that. On the other hand, it had cash of CN¥13.8b and CN¥28.4b worth of receivables due within a year. So it actually has CN¥13.0b more liquid assets than total liabilities.

This surplus suggests that NARI Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NARI Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that NARI Technology grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NARI Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While NARI Technology 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. Over the most recent three years, NARI Technology recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case NARI Technology has CN¥13.3b in net cash and a decent-looking balance sheet. So we don't think NARI Technology'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 instance, we've identified 1 warning sign for NARI Technology that you should be aware of.

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.