Does Zhejiang XiaSha Precision Manufacturing (SZSE:001306) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Zhejiang XiaSha Precision Manufacturing Co., Ltd. (SZSE:001306) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 XiaSha Precision Manufacturing

What Is Zhejiang XiaSha Precision Manufacturing's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zhejiang XiaSha Precision Manufacturing had CN¥239.5m of debt in September 2024, down from CN¥309.4m, one year before. However, it does have CN¥413.7m in cash offsetting this, leading to net cash of CN¥174.2m.

How Strong Is Zhejiang XiaSha Precision Manufacturing's Balance Sheet?

According to the last reported balance sheet, Zhejiang XiaSha Precision Manufacturing had liabilities of CN¥340.3m due within 12 months, and liabilities of CN¥190.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥413.7m as well as receivables valued at CN¥347.2m due within 12 months. So it actually has CN¥229.8m more liquid assets than total liabilities.

This surplus suggests that Zhejiang XiaSha Precision Manufacturing has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhejiang XiaSha Precision Manufacturing has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Zhejiang XiaSha Precision Manufacturing's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang XiaSha Precision Manufacturing'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang XiaSha Precision Manufacturing 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 XiaSha Precision Manufacturing 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 it is always sensible to investigate a company's debt, in this case Zhejiang XiaSha Precision Manufacturing has CN¥174.2m in net cash and a decent-looking balance sheet. So while Zhejiang XiaSha Precision Manufacturing does not have a great balance sheet, it's certainly not too bad. 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 example Zhejiang XiaSha Precision Manufacturing has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.