ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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. As with many other companies ShenZhen Woer Heat-Shrinkable Material Co.,Ltd. (SZSE:002130) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, 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 ShenZhen Woer Heat-Shrinkable MaterialLtd had CN¥1.49b of debt in March 2024, down from CN¥1.67b, one year before. However, it does have CN¥1.06b in cash offsetting this, leading to net debt of about CN¥430.2m.

A Look At ShenZhen Woer Heat-Shrinkable MaterialLtd's Liabilities

According to the last reported balance sheet, ShenZhen Woer Heat-Shrinkable MaterialLtd had liabilities of CN¥2.63b due within 12 months, and liabilities of CN¥944.6m due beyond 12 months. On the other hand, it had cash of CN¥1.06b and CN¥2.81b worth of receivables due within a year. So it actually has CN¥291.1m more liquid assets than total liabilities.

Having regard to ShenZhen Woer Heat-Shrinkable MaterialLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥16.5b company is struggling for cash, we still think it's worth monitoring its balance sheet.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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 0.36. And its EBIT easily covers its interest expense, being 27.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, ShenZhen Woer Heat-Shrinkable MaterialLtd grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, ShenZhen Woer Heat-Shrinkable MaterialLtd produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, ShenZhen Woer Heat-Shrinkable MaterialLtd's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Considering this range of factors, it seems to us that ShenZhen Woer Heat-Shrinkable MaterialLtd is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ShenZhen Woer Heat-Shrinkable MaterialLtd (of which 1 doesn't sit too well with us!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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