Is Zhejiang NetSun (SZSE:002095) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 NetSun Co., Ltd. (SZSE:002095) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 NetSun

What Is Zhejiang NetSun's Debt?

As you can see below, Zhejiang NetSun had CN¥36.8m of debt at September 2024, down from CN¥63.1m a year prior. But on the other hand it also has CN¥438.2m in cash, leading to a CN¥401.4m net cash position.

A Look At Zhejiang NetSun's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang NetSun had liabilities of CN¥285.1m due within 12 months and liabilities of CN¥21.3m due beyond that. Offsetting this, it had CN¥438.2m in cash and CN¥250.2m in receivables that were due within 12 months. So it can boast CN¥382.0m more liquid assets than total liabilities.

This surplus suggests that Zhejiang NetSun has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhejiang NetSun has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang NetSun'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.

In the last year Zhejiang NetSun wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to CN¥500m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Zhejiang NetSun?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Zhejiang NetSun lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥228m and booked a CN¥11m accounting loss. With only CN¥401.4m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Zhejiang NetSun may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Zhejiang NetSun (including 1 which is significant) .

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.