Zhejiang Supor (SZSE:002032) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zhejiang Supor Co., Ltd. (SZSE:002032) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Zhejiang Supor

What Is Zhejiang Supor's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Zhejiang Supor had debt of CN¥425.0m, up from CN¥199.7m in one year. However, its balance sheet shows it holds CN¥3.23b in cash, so it actually has CN¥2.81b net cash.

A Look At Zhejiang Supor's Liabilities

According to the last reported balance sheet, Zhejiang Supor had liabilities of CN¥6.11b due within 12 months, and liabilities of CN¥227.7m due beyond 12 months. Offsetting this, it had CN¥3.23b in cash and CN¥3.68b in receivables that were due within 12 months. So it actually has CN¥574.0m more liquid assets than total liabilities.

Having regard to Zhejiang Supor's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥42.6b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Zhejiang Supor has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Zhejiang Supor grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Supor can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhejiang Supor 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 three years, Zhejiang Supor generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Supor has net cash of CN¥2.81b, as well as more liquid assets than liabilities. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in CN¥1.9b. So we don't think Zhejiang Supor'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. Be aware that Zhejiang Supor is showing 1 warning sign in our investment analysis , 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.