We Think Zhongyan Technology (SZSE:003001) Can Stay On Top Of Its Debt

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.' 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 note that Zhongyan Technology Co., Ltd. (SZSE:003001) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Zhongyan Technology

What Is Zhongyan Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhongyan Technology had CN¥51.2m of debt, an increase on CN¥26.4m, over one year. But it also has CN¥468.6m in cash to offset that, meaning it has CN¥417.5m net cash.

How Healthy Is Zhongyan Technology's Balance Sheet?

The latest balance sheet data shows that Zhongyan Technology had liabilities of CN¥552.7m due within a year, and liabilities of CN¥7.23m falling due after that. Offsetting this, it had CN¥468.6m in cash and CN¥987.0m in receivables that were due within 12 months. So it can boast CN¥895.7m more liquid assets than total liabilities.

This excess liquidity suggests that Zhongyan Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Zhongyan Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Zhongyan Technology turned things around in the last 12 months, delivering and EBIT of CN¥29m. 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 Zhongyan Technology'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. Zhongyan Technology 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. During the last year, Zhongyan Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhongyan Technology has net cash of CN¥417.5m, as well as more liquid assets than liabilities. So we are not troubled with Zhongyan Technology's debt use. 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. For instance, we've identified 1 warning sign for Zhongyan Technology that you should be aware of.

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.