Is Zhewen Pictures Groupltd (SHSE:601599) Using Too Much 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. We can see that Zhewen Pictures Group co.,ltd (SHSE:601599) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Zhewen Pictures Groupltd

How Much Debt Does Zhewen Pictures Groupltd Carry?

You can click the graphic below for the historical numbers, but it shows that Zhewen Pictures Groupltd had CN¥477.4m of debt in June 2024, down from CN¥640.2m, one year before. But it also has CN¥1.11b in cash to offset that, meaning it has CN¥633.4m net cash.

How Strong Is Zhewen Pictures Groupltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhewen Pictures Groupltd had liabilities of CN¥2.02b due within 12 months and liabilities of CN¥148.9m due beyond that. Offsetting this, it had CN¥1.11b in cash and CN¥1.00b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥60.5m.

This state of affairs indicates that Zhewen Pictures Groupltd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥3.84b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Zhewen Pictures Groupltd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Zhewen Pictures Groupltd grew its EBIT by 808% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Zhewen Pictures Groupltd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhewen Pictures Groupltd 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. Happily for any shareholders, Zhewen Pictures Groupltd actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Zhewen Pictures Groupltd's liabilities, but we can be reassured by the fact it has has net cash of CN¥633.4m. And it impressed us with free cash flow of CN¥154m, being 115% of its EBIT. So we don't think Zhewen Pictures Groupltd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Zhewen Pictures Groupltd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.