Zhejiang Changsheng Sliding Bearings (SZSE:300718) Seems To Use Debt Quite Sensibly

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. Importantly, Zhejiang Changsheng Sliding Bearings Co., Ltd. (SZSE:300718) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Zhejiang Changsheng Sliding Bearings Carry?

As you can see below, at the end of September 2024, Zhejiang Changsheng Sliding Bearings had CN¥113.2m of debt, up from CN¥77.6m a year ago. Click the image for more detail. But it also has CN¥409.3m in cash to offset that, meaning it has CN¥296.1m net cash.

How Healthy Is Zhejiang Changsheng Sliding Bearings' Balance Sheet?

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 actually has CN¥470.6m more liquid assets than total liabilities.

Having regard to Zhejiang Changsheng Sliding Bearings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥26.6b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

See our latest analysis for Zhejiang Changsheng Sliding Bearings

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. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhejiang Changsheng Sliding Bearings 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 most recent three years, Zhejiang Changsheng Sliding Bearings recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in CN¥213m. So is Zhejiang Changsheng Sliding Bearings's debt a risk? It doesn't seem so to us. 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. Be aware that Zhejiang Changsheng Sliding Bearings is showing 1 warning sign in our investment analysis , you should know about...

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.