We Think Hangzhou Zhongtai Cryogenic Technology (SZSE:300435) Can Stay On Top Of Its Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Hangzhou Zhongtai Cryogenic Technology Corporation (SZSE:300435) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hangzhou Zhongtai Cryogenic Technology

What Is Hangzhou Zhongtai Cryogenic Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Hangzhou Zhongtai Cryogenic Technology had debt of CN¥306.9m at the end of September 2024, a reduction from CN¥1.08b over a year. But it also has CN¥1.11b in cash to offset that, meaning it has CN¥805.1m net cash.

A Look At Hangzhou Zhongtai Cryogenic Technology's Liabilities

According to the last reported balance sheet, Hangzhou Zhongtai Cryogenic Technology had liabilities of CN¥1.42b due within 12 months, and liabilities of CN¥60.7m due beyond 12 months. On the other hand, it had cash of CN¥1.11b and CN¥769.8m worth of receivables due within a year. So it can boast CN¥402.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Hangzhou Zhongtai Cryogenic Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hangzhou Zhongtai Cryogenic Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Hangzhou Zhongtai Cryogenic Technology's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hangzhou Zhongtai Cryogenic 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, a company can only pay off debt with cold hard cash, not accounting profits. While Hangzhou Zhongtai Cryogenic 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. In the last three years, Hangzhou Zhongtai Cryogenic Technology's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou Zhongtai Cryogenic Technology has CN¥805.1m in net cash and a decent-looking balance sheet. So we are not troubled with Hangzhou Zhongtai Cryogenic Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hangzhou Zhongtai Cryogenic Technology 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.