Zhewen Pictures Groupltd (SHSE:601599) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Zhewen Pictures Group co.,ltd (SHSE:601599) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Zhewen Pictures Groupltd

What Is Zhewen Pictures Groupltd's Debt?

The image below, which you can click on for greater detail, shows that Zhewen Pictures Groupltd had debt of CN¥388.3m at the end of September 2024, a reduction from CN¥537.3m over a year. However, its balance sheet shows it holds CN¥1.13b in cash, so it actually has CN¥744.0m net cash.

How Strong Is Zhewen Pictures Groupltd's Balance Sheet?

According to the last reported balance sheet, Zhewen Pictures Groupltd had liabilities of CN¥1.98b due within 12 months, and liabilities of CN¥141.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.13b as well as receivables valued at CN¥997.6m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Zhewen Pictures Groupltd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.58b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Zhewen Pictures Groupltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Zhewen Pictures Groupltd grew its EBIT by 220% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhewen Pictures Groupltd'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 company can only pay off debt with cold hard cash, not accounting profits. Zhewen Pictures Groupltd 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, Zhewen Pictures Groupltd produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhewen Pictures Groupltd has CN¥744.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 220% year-on-year EBIT growth. So we don't think Zhewen Pictures Groupltd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zhewen Pictures Groupltd is showing 1 warning sign in our investment analysis , you should know about...

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.