Zhongshan Broad-Ocean Motor (SZSE:002249) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Zhongshan Broad-Ocean Motor Co., Ltd. (SZSE:002249) 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?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhongshan Broad-Ocean Motor

What Is Zhongshan Broad-Ocean Motor's Debt?

As you can see below, Zhongshan Broad-Ocean Motor had CN¥80.7m of debt at March 2024, down from CN¥93.2m a year prior. However, its balance sheet shows it holds CN¥3.16b in cash, so it actually has CN¥3.08b net cash.

How Healthy Is Zhongshan Broad-Ocean Motor's Balance Sheet?

We can see from the most recent balance sheet that Zhongshan Broad-Ocean Motor had liabilities of CN¥6.77b falling due within a year, and liabilities of CN¥969.3m due beyond that. Offsetting these obligations, it had cash of CN¥3.16b as well as receivables valued at CN¥4.87b due within 12 months. So it actually has CN¥288.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhongshan Broad-Ocean Motor could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhongshan Broad-Ocean Motor has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Zhongshan Broad-Ocean Motor has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhongshan Broad-Ocean Motor'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhongshan Broad-Ocean Motor has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Zhongshan Broad-Ocean Motor actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhongshan Broad-Ocean Motor has net cash of CN¥3.08b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.1b, being 223% of its EBIT. So we don't think Zhongshan Broad-Ocean Motor's use of debt is risky. 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 1 warning sign for Zhongshan Broad-Ocean Motor you should know about.

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.

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.