These 4 Measures Indicate That Zhejiang Jinggong Integration Technology (SZSE:002006) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Jinggong Integration Technology Co., Ltd. (SZSE:002006) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhejiang Jinggong Integration Technology

What Is Zhejiang Jinggong Integration Technology's Net Debt?

As you can see below, at the end of March 2024, Zhejiang Jinggong Integration Technology had CN¥278.0m of debt, up from CN¥103.1m a year ago. Click the image for more detail. But it also has CN¥665.7m in cash to offset that, meaning it has CN¥387.7m net cash.

How Healthy Is Zhejiang Jinggong Integration Technology's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Jinggong Integration Technology had liabilities of CN¥1.35b falling due within a year, and liabilities of CN¥27.1m due beyond that. On the other hand, it had cash of CN¥665.7m and CN¥1.07b worth of receivables due within a year. So it can boast CN¥354.2m more liquid assets than total liabilities.

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

It is just as well that Zhejiang Jinggong Integration Technology's load is not too heavy, because its EBIT was down 52% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Jinggong Integration Technology 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. Zhejiang Jinggong Integration Technology 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. Looking at the most recent three years, Zhejiang Jinggong Integration Technology recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Jinggong Integration Technology has net cash of CN¥387.7m, as well as more liquid assets than liabilities. So we don't have any problem with Zhejiang Jinggong Integration Technology's use of debt. 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. Case in point: We've spotted 2 warning signs for Zhejiang Jinggong Integration Technology you should be aware of, and 1 of them is a bit concerning.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.