Zhejiang Changsheng Sliding Bearings (SZSE:300718) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Zhejiang Changsheng Sliding Bearings Co., Ltd. (SZSE:300718) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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?

The image below, which you can click on for greater detail, shows that at September 2024 Zhejiang Changsheng Sliding Bearings had debt of CN¥113.2m, up from CN¥77.6m in one year. However, it does have CN¥409.3m in cash offsetting this, leading to net cash of CN¥296.1m.

A Look At Zhejiang Changsheng Sliding Bearings' Liabilities

The latest balance sheet data shows that Zhejiang Changsheng Sliding Bearings had liabilities of CN¥263.0m due within a year, and liabilities of CN¥30.1m falling due after that. On the other hand, it had cash of CN¥409.3m and CN¥354.4m worth of receivables due within a year. So it can boast CN¥470.6m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Changsheng Sliding Bearings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Changsheng Sliding Bearings boasts net cash, so it's fair to say it does not have a heavy debt load!

Zhejiang Changsheng Sliding Bearings's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhejiang Changsheng Sliding Bearings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Zhejiang Changsheng Sliding Bearings produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. 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¥296.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥213m, being 68% of its EBIT. So we don't think Zhejiang Changsheng Sliding Bearings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Zhejiang Changsheng Sliding Bearings that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.