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

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.' 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. As with many other companies Zhejiang VIE Science & Technology Co., Ltd. (SZSE:002590) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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¥583.9m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥1.13b in cash to offset that, meaning it has CN¥543.1m net cash.

How Healthy Is Zhejiang VIE Science & Technology's Balance Sheet?

According to the last reported balance sheet, Zhejiang VIE Science & Technology had liabilities of CN¥2.67b due within 12 months, and liabilities of CN¥260.5m due beyond 12 months. On the other hand, it had cash of CN¥1.13b and CN¥1.87b worth of receivables due within a year. So it can boast CN¥72.8m more liquid assets than total liabilities.

This state of affairs indicates that Zhejiang VIE Science & Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.20b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Zhejiang VIE Science & Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Zhejiang VIE Science & Technology grew its EBIT by 270% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Zhejiang VIE Science & Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang VIE Science & Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three 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

While it is always sensible to investigate a company's debt, in this case Zhejiang VIE Science & Technology has CN¥543.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 270% over the last year. So we are not troubled with Zhejiang VIE Science & Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Zhejiang VIE Science & Technology , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.