Does Zhejiang Changsheng Sliding Bearings (SZSE:300718) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Zhejiang Changsheng Sliding Bearings Co., Ltd. (SZSE:300718) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Zhejiang Changsheng Sliding Bearings

How Much Debt Does Zhejiang Changsheng Sliding Bearings Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhejiang Changsheng Sliding Bearings had CN¥141.8m of debt, an increase on CN¥67.5m, over one year. However, its balance sheet shows it holds CN¥805.7m in cash, so it actually has CN¥663.8m net cash.

How Strong Is Zhejiang Changsheng Sliding Bearings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Changsheng Sliding Bearings had liabilities of CN¥278.9m due within 12 months and liabilities of CN¥38.0m due beyond that. Offsetting this, it had CN¥805.7m in cash and CN¥337.1m in receivables that were due within 12 months. So it can boast CN¥825.9m more liquid assets than total liabilities.

This excess liquidity suggests that Zhejiang Changsheng Sliding Bearings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Zhejiang Changsheng Sliding Bearings has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Zhejiang Changsheng Sliding Bearings grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. 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 Changsheng Sliding Bearings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Changsheng Sliding Bearings 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 most recent three years, Zhejiang Changsheng Sliding Bearings recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Changsheng Sliding Bearings has net cash of CN¥663.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 28% year-on-year EBIT growth. So is Zhejiang Changsheng Sliding Bearings's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Zhejiang Changsheng Sliding Bearings that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.