These 4 Measures Indicate That Zhangjiagang Furui Special Equipment (SZSE:300228) Is Using Debt Reasonably Well

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.' 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 Zhangjiagang Furui Special Equipment Co., Ltd. (SZSE:300228) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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.

View our latest analysis for Zhangjiagang Furui Special Equipment

What Is Zhangjiagang Furui Special Equipment's Net Debt?

The image below, which you can click on for greater detail, shows that Zhangjiagang Furui Special Equipment had debt of CN¥476.8m at the end of September 2023, a reduction from CN¥617.4m over a year. However, its balance sheet shows it holds CN¥1.04b in cash, so it actually has CN¥567.4m net cash.

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

We can see from the most recent balance sheet that Zhangjiagang Furui Special Equipment had liabilities of CN¥2.31b falling due within a year, and liabilities of CN¥20.3m due beyond that. On the other hand, it had cash of CN¥1.04b and CN¥600.2m worth of receivables due within a year. So it has liabilities totalling CN¥684.8m more than its cash and near-term receivables, combined.

Given Zhangjiagang Furui Special Equipment has a market capitalization of CN¥4.39b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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!

We also note that Zhangjiagang Furui Special Equipment improved its EBIT from a last year's loss to a positive CN¥1.7m. There's no doubt that we learn most about debt from the balance sheet. But it is Zhangjiagang Furui Special Equipment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhangjiagang Furui Special Equipment 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 year, Zhangjiagang Furui Special Equipment actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Zhangjiagang Furui Special Equipment does have more liabilities than liquid assets, it also has net cash of CN¥567.4m. The cherry on top was that in converted 5,360% of that EBIT to free cash flow, bringing in CN¥91m. So we don't have any problem with Zhangjiagang Furui Special Equipment's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Zhangjiagang Furui Special Equipment has 1 warning sign we think you should be aware of.

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.