Does Shaanxi Zhongtian Rocket Technology (SZSE:003009) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shaanxi Zhongtian Rocket Technology Co., Ltd (SZSE:003009) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shaanxi Zhongtian Rocket Technology

What Is Shaanxi Zhongtian Rocket Technology's Debt?

As you can see below, Shaanxi Zhongtian Rocket Technology had CN¥609.6m of debt at September 2024, down from CN¥665.9m a year prior. But on the other hand it also has CN¥956.4m in cash, leading to a CN¥346.8m net cash position.

A Look At Shaanxi Zhongtian Rocket Technology's Liabilities

According to the last reported balance sheet, Shaanxi Zhongtian Rocket Technology had liabilities of CN¥938.9m due within 12 months, and liabilities of CN¥502.9m due beyond 12 months. Offsetting this, it had CN¥956.4m in cash and CN¥634.6m in receivables that were due within 12 months. So it can boast CN¥149.1m more liquid assets than total liabilities.

This surplus suggests that Shaanxi Zhongtian Rocket Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shaanxi Zhongtian Rocket Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Shaanxi Zhongtian Rocket Technology grew its EBIT by 12% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shaanxi Zhongtian Rocket Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shaanxi Zhongtian Rocket Technology 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. Over the last three years, Shaanxi Zhongtian Rocket Technology saw substantial negative free cash flow, in total. 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 Shaanxi Zhongtian Rocket Technology has net cash of CN¥346.8m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So we don't have any problem with Shaanxi Zhongtian Rocket Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Shaanxi Zhongtian Rocket Technology .

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.

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.