Zhejiang Huatie Emergency Equipment Science & TechnologyLtd (SHSE:603300) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Zhejiang Huatie Emergency Equipment Science & Technology Co.,Ltd. (SHSE:603300) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Zhejiang Huatie Emergency Equipment Science & TechnologyLtd

What Is Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Zhejiang Huatie Emergency Equipment Science & TechnologyLtd had debt of CN¥3.66b, up from CN¥2.35b in one year. However, it does have CN¥104.3m in cash offsetting this, leading to net debt of about CN¥3.56b.

How Strong Is Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Huatie Emergency Equipment Science & TechnologyLtd had liabilities of CN¥5.53b falling due within a year, and liabilities of CN¥7.52b due beyond that. Offsetting this, it had CN¥104.3m in cash and CN¥3.72b in receivables that were due within 12 months. So its liabilities total CN¥9.22b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥12.0b, so it does suggest shareholders should keep an eye on Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Zhejiang Huatie Emergency Equipment Science & TechnologyLtd has net debt worth 2.4 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 3.3 times the interest expense. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. We note that Zhejiang Huatie Emergency Equipment Science & TechnologyLtd grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Zhejiang Huatie Emergency Equipment Science & TechnologyLtd recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

When it comes to the balance sheet, the standout positive for Zhejiang Huatie Emergency Equipment Science & TechnologyLtd was the fact that it seems able to grow its EBIT confidently. However, our other observations weren't so heartening. For instance it seems like it has to struggle a bit to cover its interest expense with its EBIT. Looking at all this data makes us feel a little cautious about Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhejiang Huatie Emergency Equipment Science & TechnologyLtd you should know about.

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.