These 4 Measures Indicate That Zhejiang Natural Outdoor Goods (SHSE:605080) Is Using Debt Reasonably Well

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 Natural Outdoor Goods Inc. (SHSE:605080) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Natural Outdoor Goods

How Much Debt Does Zhejiang Natural Outdoor Goods Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Zhejiang Natural Outdoor Goods had debt of CN¥91.4m, up from CN¥50.0m in one year. However, its balance sheet shows it holds CN¥1.06b in cash, so it actually has CN¥969.3m net cash.

How Strong Is Zhejiang Natural Outdoor Goods' Balance Sheet?

The latest balance sheet data shows that Zhejiang Natural Outdoor Goods had liabilities of CN¥359.1m due within a year, and liabilities of CN¥17.6m falling due after that. On the other hand, it had cash of CN¥1.06b and CN¥180.6m worth of receivables due within a year. So it can boast CN¥864.6m more liquid assets than total liabilities.

It's good to see that Zhejiang Natural Outdoor Goods has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Zhejiang Natural Outdoor Goods boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Zhejiang Natural Outdoor Goods has increased its EBIT by 6.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang Natural Outdoor Goods's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Natural Outdoor Goods 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. Over the last three years, Zhejiang Natural Outdoor Goods reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Natural Outdoor Goods has CN¥969.3m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 6.0% over the last year. So we are not troubled with Zhejiang Natural Outdoor Goods's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhejiang Natural Outdoor Goods's earnings per share history for free.

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.