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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Zhejiang Weixing Industrial Development Co., Ltd. (SZSE:002003) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhejiang Weixing Industrial Development

How Much Debt Does Zhejiang Weixing Industrial Development Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang Weixing Industrial Development had CN¥1.30b of debt, an increase on CN¥1.13b, over one year. But it also has CN¥1.48b in cash to offset that, meaning it has CN¥184.8m net cash.

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

We can see from the most recent balance sheet that Zhejiang Weixing Industrial Development had liabilities of CN¥2.05b falling due within a year, and liabilities of CN¥225.7m due beyond that. Offsetting this, it had CN¥1.48b in cash and CN¥806.5m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Zhejiang Weixing Industrial Development's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥15.7b company is short on cash, but still worth keeping an eye on the 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.

In addition to that, we're happy to report that Zhejiang Weixing Industrial Development has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Zhejiang Weixing Industrial Development 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. In the last three years, Zhejiang Weixing Industrial Development's free cash flow amounted to 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Weixing Industrial Development has net cash of CN¥184.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 39% year-on-year EBIT growth. So is Zhejiang Weixing Industrial Development's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Zhejiang Weixing Industrial Development that you should be aware of.

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.