Is Zhejiang Weigang Technology (SZSE:001256) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Zhejiang Weigang Technology Co., Ltd. (SZSE:001256) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Weigang Technology

How Much Debt Does Zhejiang Weigang Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang Weigang Technology had CN¥89.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥304.3m in cash, so it actually has CN¥215.3m net cash.

How Healthy Is Zhejiang Weigang Technology's Balance Sheet?

According to the last reported balance sheet, Zhejiang Weigang Technology had liabilities of CN¥268.9m due within 12 months, and liabilities of CN¥13.7m due beyond 12 months. Offsetting this, it had CN¥304.3m in cash and CN¥90.6m in receivables that were due within 12 months. So it can boast CN¥112.3m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Weigang Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Weigang Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Zhejiang Weigang Technology grew its EBIT by 10% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang Weigang Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Weigang Technology 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 Weigang Technology generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Weigang Technology has net cash of CN¥215.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥80m, being 94% of its EBIT. So is Zhejiang Weigang Technology's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Zhejiang Weigang Technology , and understanding them should be part of your investment process.

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.