Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, NAURA Technology Group Co., Ltd. (SZSE:002371) does carry debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is NAURA Technology Group's Debt?
As you can see below, at the end of September 2023, NAURA Technology Group had CN¥5.77b of debt, up from CN¥3.93b a year ago. Click the image for more detail. However, it does have CN¥11.6b in cash offsetting this, leading to net cash of CN¥5.83b.
How Strong Is NAURA Technology Group's Balance Sheet?
According to the last reported balance sheet, NAURA Technology Group had liabilities of CN¥20.1b due within 12 months, and liabilities of CN¥9.51b due beyond 12 months. On the other hand, it had cash of CN¥11.6b and CN¥7.04b worth of receivables due within a year. So its liabilities total CN¥10.9b more than the combination of its cash and short-term receivables.
Of course, NAURA Technology Group has a titanic market capitalization of CN¥137.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, NAURA Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that NAURA Technology Group has boosted its EBIT by 71%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NAURA Technology Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. NAURA Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, NAURA Technology Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that NAURA Technology Group has CN¥5.83b in net cash. And it impressed us with its EBIT growth of 71% over the last year. So we are not troubled with NAURA Technology Group's debt use. 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. For example, we've discovered 1 warning sign for NAURA Technology Group that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.