Does Zhejiang Dun'an Artificial Environment (SZSE:002011) Have A Healthy Balance Sheet?

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.' 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. We note that Zhejiang Dun'an Artificial Environment Co., Ltd (SZSE:002011) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Dun'an Artificial Environment

What Is Zhejiang Dun'an Artificial Environment's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Dun'an Artificial Environment had debt of CN¥1.66b, up from CN¥1.37b in one year. But it also has CN¥2.72b in cash to offset that, meaning it has CN¥1.05b net cash.

A Look At Zhejiang Dun'an Artificial Environment's Liabilities

We can see from the most recent balance sheet that Zhejiang Dun'an Artificial Environment had liabilities of CN¥5.31b falling due within a year, and liabilities of CN¥878.7m due beyond that. Offsetting these obligations, it had cash of CN¥2.72b as well as receivables valued at CN¥4.21b due within 12 months. So it can boast CN¥736.8m more liquid assets than total liabilities.

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

Another good sign is that Zhejiang Dun'an Artificial Environment has been able to increase its EBIT by 26% in twelve months, making it easier to pay down 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 Dun'an Artificial Environment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Dun'an Artificial Environment 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. Over the most recent three years, Zhejiang Dun'an Artificial Environment recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Dun'an Artificial Environment has net cash of CN¥1.05b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥581m, being 79% of its EBIT. So is Zhejiang Dun'an Artificial Environment's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Zhejiang Dun'an Artificial Environment, you may well want to click here to check an interactive graph of its earnings per share history.

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.