Here's Why Zhuhai Enpower ElectricLtd (SZSE:300681) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Zhuhai Enpower Electric Co.,Ltd. (SZSE:300681) makes use of debt. But is this debt a concern to shareholders?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Zhuhai Enpower ElectricLtd's Debt?

As you can see below, Zhuhai Enpower ElectricLtd had CN¥781.5m of debt at September 2024, down from CN¥1.04b a year prior. However, it does have CN¥840.3m in cash offsetting this, leading to net cash of CN¥58.8m.

How Strong Is Zhuhai Enpower ElectricLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhuhai Enpower ElectricLtd had liabilities of CN¥1.90b due within 12 months and liabilities of CN¥708.0m due beyond that. Offsetting these obligations, it had cash of CN¥840.3m as well as receivables valued at CN¥752.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.02b.

Since publicly traded Zhuhai Enpower ElectricLtd shares are worth a total of CN¥8.64b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Zhuhai Enpower ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Zhuhai Enpower ElectricLtd

Although Zhuhai Enpower ElectricLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥28m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhuhai Enpower ElectricLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhuhai Enpower ElectricLtd 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 year, Zhuhai Enpower ElectricLtd recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Zhuhai Enpower ElectricLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥58.8m. So we are not troubled with Zhuhai Enpower ElectricLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Zhuhai Enpower ElectricLtd that you should be aware of before investing here.

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.