Is Nancal TechnologyLtd (SHSE:603859) A Risky Investment?

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.' 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 can see that Nancal Technology Co.,Ltd (SHSE:603859) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Nancal TechnologyLtd

How Much Debt Does Nancal TechnologyLtd Carry?

As you can see below, at the end of June 2024, Nancal TechnologyLtd had CN¥156.3m of debt, up from CN¥95.6m a year ago. Click the image for more detail. However, it does have CN¥407.9m in cash offsetting this, leading to net cash of CN¥251.6m.

How Healthy Is Nancal TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Nancal TechnologyLtd had liabilities of CN¥904.9m falling due within a year, and liabilities of CN¥89.0m due beyond that. Offsetting this, it had CN¥407.9m in cash and CN¥1.58b in receivables that were due within 12 months. So it actually has CN¥995.6m more liquid assets than total liabilities.

This excess liquidity suggests that Nancal TechnologyLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Nancal TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Nancal TechnologyLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nancal TechnologyLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nancal TechnologyLtd 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. During the last three years, Nancal TechnologyLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nancal TechnologyLtd has CN¥251.6m in net cash and a decent-looking balance sheet. So we are not troubled with Nancal TechnologyLtd's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Nancal TechnologyLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.