Zhejiang Wanma (SZSE:002276) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Zhejiang Wanma Co., Ltd. (SZSE:002276) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhejiang Wanma

What Is Zhejiang Wanma's Debt?

You can click the graphic below for the historical numbers, but it shows that Zhejiang Wanma had CN¥1.16b of debt in September 2024, down from CN¥2.09b, one year before. But on the other hand it also has CN¥2.45b in cash, leading to a CN¥1.29b net cash position.

How Healthy Is Zhejiang Wanma's Balance Sheet?

The latest balance sheet data shows that Zhejiang Wanma had liabilities of CN¥8.54b due within a year, and liabilities of CN¥993.3m falling due after that. Offsetting this, it had CN¥2.45b in cash and CN¥7.54b in receivables that were due within 12 months. So it can boast CN¥455.2m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Wanma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Wanma boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Zhejiang Wanma's load is not too heavy, because its EBIT was down 36% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhejiang Wanma 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zhejiang Wanma 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. In the last three years, Zhejiang Wanma created free cash flow amounting to 13% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Wanma has net cash of CN¥1.29b, as well as more liquid assets than liabilities. So we don't have any problem with Zhejiang Wanma's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhejiang Wanma you should know about.

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.