We Think Zhejiang VIE Science & Technology (SZSE:002590) Can Stay On Top Of Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zhejiang VIE Science & Technology Co., Ltd. (SZSE:002590) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zhejiang VIE Science & Technology

What Is Zhejiang VIE Science & Technology's Net Debt?

As you can see below, Zhejiang VIE Science & Technology had CN¥571.5m of debt at March 2024, down from CN¥619.8m a year prior. However, its balance sheet shows it holds CN¥782.5m in cash, so it actually has CN¥210.9m net cash.

A Look At Zhejiang VIE Science & Technology's Liabilities

According to the last reported balance sheet, Zhejiang VIE Science & Technology had liabilities of CN¥2.53b due within 12 months, and liabilities of CN¥350.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥782.5m as well as receivables valued at CN¥1.68b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥414.7m.

Since publicly traded Zhejiang VIE Science & Technology shares are worth a total of CN¥7.31b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Zhejiang VIE Science & Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Zhejiang VIE Science & Technology grew its EBIT by 1,576% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang VIE Science & Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang VIE Science & Technology 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 last two years, Zhejiang VIE Science & Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Zhejiang VIE Science & Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥210.9m. And we liked the look of last year's 1,576% year-on-year EBIT growth. So we are not troubled with Zhejiang VIE Science & Technology'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zhejiang VIE Science & Technology you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.