Does Zhejiang Taotao Vehicles (SZSE:301345) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Zhejiang Taotao Vehicles Co., Ltd. (SZSE:301345) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Taotao Vehicles

What Is Zhejiang Taotao Vehicles's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Taotao Vehicles had debt of CN¥486.3m, up from CN¥287.6m in one year. But it also has CN¥2.35b in cash to offset that, meaning it has CN¥1.87b net cash.

How Strong Is Zhejiang Taotao Vehicles' Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Taotao Vehicles had liabilities of CN¥1.03b falling due within a year, and liabilities of CN¥80.3m due beyond that. Offsetting these obligations, it had cash of CN¥2.35b as well as receivables valued at CN¥408.0m due within 12 months. So it actually has CN¥1.65b more liquid assets than total liabilities.

This excess liquidity suggests that Zhejiang Taotao Vehicles is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Zhejiang Taotao Vehicles has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Zhejiang Taotao Vehicles grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Taotao Vehicles can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Taotao Vehicles 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. Looking at the most recent three years, Zhejiang Taotao Vehicles recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Taotao Vehicles has net cash of CN¥1.87b, as well as more liquid assets than liabilities. And we liked the look of last year's 15% year-on-year EBIT growth. So we don't think Zhejiang Taotao Vehicles's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Zhejiang Taotao Vehicles .

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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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.

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