Is Zhejiang Entive Smart Kitchen Appliance (SZSE:300911) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Zhejiang Entive Smart Kitchen Appliance Co., Ltd. (SZSE:300911) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Entive Smart Kitchen Appliance

What Is Zhejiang Entive Smart Kitchen Appliance's Net Debt?

As you can see below, at the end of September 2024, Zhejiang Entive Smart Kitchen Appliance had CN¥456.3m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥1.27b in cash offsetting this, leading to net cash of CN¥810.2m.

A Look At Zhejiang Entive Smart Kitchen Appliance's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Entive Smart Kitchen Appliance had liabilities of CN¥216.3m due within 12 months and liabilities of CN¥502.2m due beyond that. On the other hand, it had cash of CN¥1.27b and CN¥50.5m worth of receivables due within a year. So it actually has CN¥598.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Entive Smart Kitchen Appliance could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhejiang Entive Smart Kitchen Appliance has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Entive Smart Kitchen Appliance'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.

Over 12 months, Zhejiang Entive Smart Kitchen Appliance made a loss at the EBIT level, and saw its revenue drop to CN¥732m, which is a fall of 42%. That makes us nervous, to say the least.

So How Risky Is Zhejiang Entive Smart Kitchen Appliance?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Zhejiang Entive Smart Kitchen Appliance had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥113m and booked a CN¥7.1m accounting loss. With only CN¥810.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Zhejiang Entive Smart Kitchen Appliance you should be aware of.

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.