Does Zhejiang Weixing Industrial Development (SZSE:002003) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zhejiang Weixing Industrial Development Co., Ltd. (SZSE:002003) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhejiang Weixing Industrial Development

How Much Debt Does Zhejiang Weixing Industrial Development Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Zhejiang Weixing Industrial Development had debt of CN¥1.34b, up from CN¥1.14b in one year. However, it does have CN¥1.63b in cash offsetting this, leading to net cash of CN¥293.5m.

How Strong Is Zhejiang Weixing Industrial Development's Balance Sheet?

According to the last reported balance sheet, Zhejiang Weixing Industrial Development had liabilities of CN¥2.23b due within 12 months, and liabilities of CN¥223.3m due beyond 12 months. Offsetting this, it had CN¥1.63b in cash and CN¥854.3m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Zhejiang Weixing Industrial Development's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥14.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Zhejiang Weixing Industrial Development has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Zhejiang Weixing Industrial Development grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang Weixing Industrial Development'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang Weixing Industrial Development 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. Looking at the most recent three years, Zhejiang Weixing Industrial Development recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Weixing Industrial Development has CN¥293.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 46% year-on-year EBIT growth. So is Zhejiang Weixing Industrial Development's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhejiang Weixing Industrial Development (of which 1 is concerning!) 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.