Is Zhejiang grandwall electric science&technologyltd (SHSE:603897) Using Too Much Debt?

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.' 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. As with many other companies Zhejiang grandwall electric science&technology co.,ltd. (SHSE:603897) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhejiang grandwall electric science&technologyltd

What Is Zhejiang grandwall electric science&technologyltd's Net Debt?

As you can see below, at the end of September 2024, Zhejiang grandwall electric science&technologyltd had CN¥1.00b of debt, up from CN¥746.1m a year ago. Click the image for more detail. However, it does have CN¥1.75b in cash offsetting this, leading to net cash of CN¥744.1m.

A Look At Zhejiang grandwall electric science&technologyltd's Liabilities

The latest balance sheet data shows that Zhejiang grandwall electric science&technologyltd had liabilities of CN¥3.99b due within a year, and liabilities of CN¥51.2m falling due after that. On the other hand, it had cash of CN¥1.75b and CN¥3.04b worth of receivables due within a year. So it actually has CN¥742.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang grandwall electric science&technologyltd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang grandwall electric science&technologyltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Zhejiang grandwall electric science&technologyltd grew its EBIT by 211% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang grandwall electric science&technologyltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang grandwall electric science&technologyltd 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. Over the last three years, Zhejiang grandwall electric science&technologyltd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang grandwall electric science&technologyltd has net cash of CN¥744.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 211% over the last year. So we don't have any problem with Zhejiang grandwall electric science&technologyltd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Zhejiang grandwall electric science&technologyltd has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.