Is Zhangjiagang Furui Special Equipment (SZSE:300228) Using Too Much 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 note that Zhangjiagang Furui Special Equipment Co., Ltd. (SZSE:300228) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhangjiagang Furui Special Equipment

What Is Zhangjiagang Furui Special Equipment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zhangjiagang Furui Special Equipment had CN¥248.5m of debt in June 2024, down from CN¥645.7m, one year before. However, it does have CN¥582.2m in cash offsetting this, leading to net cash of CN¥333.7m.

How Healthy Is Zhangjiagang Furui Special Equipment's Balance Sheet?

The latest balance sheet data shows that Zhangjiagang Furui Special Equipment had liabilities of CN¥2.10b due within a year, and liabilities of CN¥50.0m falling due after that. Offsetting this, it had CN¥582.2m in cash and CN¥1.04b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥527.0m.

Given Zhangjiagang Furui Special Equipment has a market capitalization of CN¥3.57b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Zhangjiagang Furui Special Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Zhangjiagang Furui Special Equipment made a loss at the EBIT level, last year, it was also good to see that it generated CN¥322m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhangjiagang Furui Special Equipment will need earnings to service that debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Zhangjiagang Furui Special Equipment 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 year, Zhangjiagang Furui Special Equipment 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 Zhangjiagang Furui Special Equipment does have more liabilities than liquid assets, it also has net cash of CN¥333.7m. So we are not troubled with Zhangjiagang Furui Special Equipment's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Zhangjiagang Furui Special Equipment, you may well want to click here to check an interactive graph of its earnings per share history.

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.