Does Nanjing Baose (SZSE:300402) Have A Healthy Balance Sheet?

Simply Wall St · 03/13 22:14

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Nanjing Baose Co., Ltd. (SZSE:300402) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nanjing Baose

What Is Nanjing Baose's Net Debt?

As you can see below, Nanjing Baose had CN¥193.1m of debt at September 2024, down from CN¥459.4m a year prior. However, its balance sheet shows it holds CN¥735.6m in cash, so it actually has CN¥542.5m net cash.

debt-equity-history-analysis
SZSE:300402 Debt to Equity History March 13th 2025

How Strong Is Nanjing Baose's Balance Sheet?

According to the last reported balance sheet, Nanjing Baose had liabilities of CN¥642.2m due within 12 months, and liabilities of CN¥207.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥735.6m as well as receivables valued at CN¥699.1m due within 12 months. So it actually has CN¥585.1m more liquid assets than total liabilities.

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

In fact Nanjing Baose's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Nanjing Baose 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nanjing Baose 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, Nanjing Baose recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nanjing Baose has CN¥542.5m in net cash and a decent-looking balance sheet. So we are not troubled with Nanjing Baose'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. We've identified 2 warning signs with Nanjing Baose , and understanding them should be part of your investment process.

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.