Zhejiang Dingli MachineryLtd (SHSE:603338) Could Easily Take On More Debt

Warren Buffett famously said, '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. We note that Zhejiang Dingli Machinery Co.,Ltd (SHSE:603338) 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhejiang Dingli MachineryLtd

How Much Debt Does Zhejiang Dingli MachineryLtd Carry?

As you can see below, Zhejiang Dingli MachineryLtd had CN¥1.11b of debt at September 2024, down from CN¥1.93b a year prior. However, it does have CN¥5.16b in cash offsetting this, leading to net cash of CN¥4.05b.

A Look At Zhejiang Dingli MachineryLtd's Liabilities

The latest balance sheet data shows that Zhejiang Dingli MachineryLtd had liabilities of CN¥4.62b due within a year, and liabilities of CN¥810.9m falling due after that. On the other hand, it had cash of CN¥5.16b and CN¥4.06b worth of receivables due within a year. So it actually has CN¥3.80b more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Dingli MachineryLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhejiang Dingli MachineryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Zhejiang Dingli MachineryLtd grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang Dingli MachineryLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Zhejiang Dingli MachineryLtd 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 most recent three years, Zhejiang Dingli MachineryLtd recorded free cash flow worth 72% 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Dingli MachineryLtd has net cash of CN¥4.05b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So we don't think Zhejiang Dingli MachineryLtd's use of debt is risky. 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 - Zhejiang Dingli MachineryLtd has 1 warning sign we think you should be aware of.

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.