We Think Yantai Zhenghai Magnetic Material (SZSE:300224) Can Stay On Top Of Its Debt

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 can see that Yantai Zhenghai Magnetic Material Co., Ltd. (SZSE:300224) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yantai Zhenghai Magnetic Material

How Much Debt Does Yantai Zhenghai Magnetic Material Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Yantai Zhenghai Magnetic Material had debt of CN¥1.17b, up from CN¥229.8m in one year. But on the other hand it also has CN¥1.79b in cash, leading to a CN¥620.6m net cash position.

A Look At Yantai Zhenghai Magnetic Material's Liabilities

We can see from the most recent balance sheet that Yantai Zhenghai Magnetic Material had liabilities of CN¥2.98b falling due within a year, and liabilities of CN¥1.34b due beyond that. Offsetting this, it had CN¥1.79b in cash and CN¥2.57b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Yantai Zhenghai Magnetic Material's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥9.15b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Yantai Zhenghai Magnetic Material boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Yantai Zhenghai Magnetic Material has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. 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 Yantai Zhenghai Magnetic Material'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Yantai Zhenghai Magnetic Material 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. Over the last three years, Yantai Zhenghai Magnetic Material saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yantai Zhenghai Magnetic Material has net cash of CN¥620.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 31% over the last year. So we don't have any problem with Yantai Zhenghai Magnetic Material's use of debt. 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 2 warning signs for Yantai Zhenghai Magnetic Material (1 shouldn't be ignored) 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.