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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Changzhou Nrb Corporation (SZSE:002708) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Changzhou Nrb's Debt?
As you can see below, at the end of March 2024, Changzhou Nrb had CN¥660.1m of debt, up from CN¥549.4m a year ago. Click the image for more detail. However, it does have CN¥569.8m in cash offsetting this, leading to net debt of about CN¥90.4m.
A Look At Changzhou Nrb's Liabilities
Zooming in on the latest balance sheet data, we can see that Changzhou Nrb had liabilities of CN¥1.43b due within 12 months and liabilities of CN¥131.4m due beyond that. Offsetting these obligations, it had cash of CN¥569.8m as well as receivables valued at CN¥848.9m due within 12 months. So it has liabilities totalling CN¥142.5m more than its cash and near-term receivables, combined.
Of course, Changzhou Nrb has a market capitalization of CN¥5.45b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Changzhou Nrb will need earnings to service that debt. 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 Changzhou Nrb wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to CN¥2.0b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly appreciate Changzhou Nrb's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥35m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥108m of cash over the last year. So to be blunt we think it is risky. 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 3 warning signs for Changzhou Nrb (1 is significant!) that you should be aware of before investing here.
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.