ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 ShenZhen Woer Heat-Shrinkable Material Co.,Ltd. (SZSE:002130) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ShenZhen Woer Heat-Shrinkable MaterialLtd

How Much Debt Does ShenZhen Woer Heat-Shrinkable MaterialLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 ShenZhen Woer Heat-Shrinkable MaterialLtd had CN¥1.76b of debt, an increase on CN¥1.66b, over one year. On the flip side, it has CN¥1.20b in cash leading to net debt of about CN¥565.2m.

How Healthy Is ShenZhen Woer Heat-Shrinkable MaterialLtd's Balance Sheet?

We can see from the most recent balance sheet that ShenZhen Woer Heat-Shrinkable MaterialLtd had liabilities of CN¥2.65b falling due within a year, and liabilities of CN¥1.28b due beyond that. Offsetting these obligations, it had cash of CN¥1.20b as well as receivables valued at CN¥2.93b due within 12 months. So it actually has CN¥192.8m more liquid assets than total liabilities.

This state of affairs indicates that ShenZhen Woer Heat-Shrinkable MaterialLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥17.8b company is short on cash, but still worth keeping an eye on the balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

ShenZhen Woer Heat-Shrinkable MaterialLtd has a low net debt to EBITDA ratio of only 0.45. And its EBIT covers its interest expense a whopping 36.5 times over. So we're pretty relaxed about its super-conservative use of debt. On top of that, ShenZhen Woer Heat-Shrinkable MaterialLtd grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ShenZhen Woer Heat-Shrinkable MaterialLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, ShenZhen Woer Heat-Shrinkable MaterialLtd recorded free cash flow worth 54% 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.

Our View

ShenZhen Woer Heat-Shrinkable MaterialLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its EBIT growth rate also supports that impression! Overall, we don't think ShenZhen Woer Heat-Shrinkable MaterialLtd is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, 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. To that end, you should be aware of the 1 warning sign we've spotted with ShenZhen Woer Heat-Shrinkable MaterialLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.