ZHEJIANG NARADA POWER SOURCE (SZSE:300068) Is Making Moderate Use Of Debt

Warren Buffett famously said, '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. Importantly, ZHEJIANG NARADA POWER SOURCE Co. , Ltd. (SZSE:300068) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

View our latest analysis for ZHEJIANG NARADA POWER SOURCE

How Much Debt Does ZHEJIANG NARADA POWER SOURCE Carry?

As you can see below, at the end of September 2024, ZHEJIANG NARADA POWER SOURCE had CN¥9.76b of debt, up from CN¥6.13b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥2.33b, its net debt is less, at about CN¥7.44b.

A Look At ZHEJIANG NARADA POWER SOURCE's Liabilities

We can see from the most recent balance sheet that ZHEJIANG NARADA POWER SOURCE had liabilities of CN¥11.0b falling due within a year, and liabilities of CN¥3.50b due beyond that. Offsetting this, it had CN¥2.33b in cash and CN¥3.73b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.46b.

This is a mountain of leverage relative to its market capitalization of CN¥12.1b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 NARADA POWER SOURCE can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, ZHEJIANG NARADA POWER SOURCE made a loss at the EBIT level, and saw its revenue drop to CN¥11b, which is a fall of 20%. We would much prefer see growth.

Caveat Emptor

While ZHEJIANG NARADA POWER SOURCE's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥63m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥1.1b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ZHEJIANG NARADA POWER SOURCE (of which 1 can't be ignored!) you should know about.

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.