Here's Why Zhonglu.Co.Ltd (SHSE:600818) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Zhonglu.Co.,Ltd (SHSE:600818) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zhonglu.Co.Ltd

What Is Zhonglu.Co.Ltd's Debt?

As you can see below, Zhonglu.Co.Ltd had CN¥34.1m of debt at June 2024, down from CN¥43.3m a year prior. But on the other hand it also has CN¥184.4m in cash, leading to a CN¥150.3m net cash position.

How Healthy Is Zhonglu.Co.Ltd's Balance Sheet?

We can see from the most recent balance sheet that Zhonglu.Co.Ltd had liabilities of CN¥197.2m falling due within a year, and liabilities of CN¥109.7m due beyond that. Offsetting these obligations, it had cash of CN¥184.4m as well as receivables valued at CN¥75.1m due within 12 months. So it has liabilities totalling CN¥47.4m more than its cash and near-term receivables, combined.

Having regard to Zhonglu.Co.Ltd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥3.52b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zhonglu.Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Zhonglu.Co.Ltd's load is not too heavy, because its EBIT was down 67% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhonglu.Co.Ltd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Zhonglu.Co.Ltd 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. During the last two years, Zhonglu.Co.Ltd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Zhonglu.Co.Ltd's liabilities, but we can be reassured by the fact it has has net cash of CN¥150.3m. So while Zhonglu.Co.Ltd does not have a great balance sheet, it's certainly not too bad. 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, we've discovered 2 warning signs for Zhonglu.Co.Ltd that you should be aware of before investing here.

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.