Zimplats Holdings (ASX:ZIM) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Zimplats Holdings Limited (ASX:ZIM) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zimplats Holdings

What Is Zimplats Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Zimplats Holdings had US$11.8m of debt, an increase on none, over one year. But it also has US$241.8m in cash to offset that, meaning it has US$230.0m net cash.

How Healthy Is Zimplats Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zimplats Holdings had liabilities of US$198.6m due within 12 months and liabilities of US$288.6m due beyond that. Offsetting these obligations, it had cash of US$241.8m as well as receivables valued at US$409.3m due within 12 months. So it can boast US$163.9m more liquid assets than total liabilities.

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

Better yet, Zimplats Holdings grew its EBIT by 149% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zimplats Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Zimplats Holdings 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. Looking at the most recent three years, Zimplats Holdings recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Zimplats Holdings has net cash of US$230.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 149% over the last year. So we don't think Zimplats Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Zimplats Holdings has 2 warning signs we think you should be aware of.

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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