Zhejiang Dingli MachineryLtd (SHSE:603338) Seems To Use Debt Rather Sparingly

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.' 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. We note that Zhejiang Dingli Machinery Co.,Ltd (SHSE:603338) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhejiang Dingli MachineryLtd

How Much Debt Does Zhejiang Dingli MachineryLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Zhejiang Dingli MachineryLtd had CN¥1.08b of debt in March 2024, down from CN¥1.61b, one year before. But it also has CN¥4.02b in cash to offset that, meaning it has CN¥2.94b net cash.

A Look At Zhejiang Dingli MachineryLtd's Liabilities

According to the last reported balance sheet, Zhejiang Dingli MachineryLtd had liabilities of CN¥4.58b due within 12 months, and liabilities of CN¥729.9m due beyond 12 months. Offsetting this, it had CN¥4.02b in cash and CN¥4.06b in receivables that were due within 12 months. So it can boast CN¥2.78b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Dingli MachineryLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

On top of that, Zhejiang Dingli MachineryLtd grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its debt. 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 Dingli MachineryLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Dingli MachineryLtd 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. During the last three years, Zhejiang Dingli MachineryLtd produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Dingli MachineryLtd has CN¥2.94b in net cash and a decent-looking balance sheet. And we liked the look of last year's 43% year-on-year EBIT growth. So we don't think Zhejiang Dingli MachineryLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Zhejiang Dingli MachineryLtd that you should be aware of.

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.