Zhejiang Unifull Industrial Fibre (SZSE:002427) Is Carrying A Fair Bit Of Debt

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. We can see that Zhejiang Unifull Industrial Fibre Co., Ltd. (SZSE:002427) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

What Is Zhejiang Unifull Industrial Fibre's Debt?

As you can see below, at the end of September 2024, Zhejiang Unifull Industrial Fibre had CN¥783.6m of debt, up from CN¥716.7m a year ago. Click the image for more detail. On the flip side, it has CN¥282.5m in cash leading to net debt of about CN¥501.1m.

How Strong Is Zhejiang Unifull Industrial Fibre's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Unifull Industrial Fibre had liabilities of CN¥853.1m falling due within a year, and liabilities of CN¥776.3m due beyond that. Offsetting this, it had CN¥282.5m in cash and CN¥713.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥633.4m more than its cash and near-term receivables, combined.

Since publicly traded Zhejiang Unifull Industrial Fibre shares are worth a total of CN¥4.27b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhejiang Unifull Industrial Fibre will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Zhejiang Unifull Industrial Fibre

Over 12 months, Zhejiang Unifull Industrial Fibre made a loss at the EBIT level, and saw its revenue drop to CN¥2.3b, which is a fall of 9.4%. We would much prefer see growth.

Caveat Emptor

Importantly, Zhejiang Unifull Industrial Fibre had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥74m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥182m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Zhejiang Unifull Industrial Fibre I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.