These 4 Measures Indicate That Zhuzhou Tianqiao Crane (SZSE:002523) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Zhuzhou Tianqiao Crane Co., Ltd. (SZSE:002523) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhuzhou Tianqiao Crane

What Is Zhuzhou Tianqiao Crane's Net Debt?

As you can see below, Zhuzhou Tianqiao Crane had CN¥194.7m of debt at September 2024, down from CN¥360.5m a year prior. However, its balance sheet shows it holds CN¥692.1m in cash, so it actually has CN¥497.4m net cash.

How Healthy Is Zhuzhou Tianqiao Crane's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhuzhou Tianqiao Crane had liabilities of CN¥2.05b due within 12 months and liabilities of CN¥116.5m due beyond that. On the other hand, it had cash of CN¥692.1m and CN¥1.66b worth of receivables due within a year. So it can boast CN¥187.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhuzhou Tianqiao Crane could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhuzhou Tianqiao Crane boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Zhuzhou Tianqiao Crane made a loss at the EBIT level, last year, it was also good to see that it generated CN¥53m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Zhuzhou Tianqiao Crane'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhuzhou Tianqiao Crane 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, Zhuzhou Tianqiao Crane actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhuzhou Tianqiao Crane has net cash of CN¥497.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥308m, being 580% of its EBIT. So is Zhuzhou Tianqiao Crane's debt a risk? It doesn't seem so 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. Case in point: We've spotted 1 warning sign for Zhuzhou Tianqiao Crane you should be aware of.

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.