Is Zhejiang Cayi Vacuum Container (SZSE:301004) Using Too Much Debt?

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 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 note that Zhejiang Cayi Vacuum Container Co., Ltd. (SZSE:301004) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Cayi Vacuum Container

What Is Zhejiang Cayi Vacuum Container's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhejiang Cayi Vacuum Container had CN¥59.0m of debt, an increase on CN¥40.0m, over one year. But it also has CN¥750.6m in cash to offset that, meaning it has CN¥691.6m net cash.

A Look At Zhejiang Cayi Vacuum Container's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Cayi Vacuum Container had liabilities of CN¥360.6m due within 12 months and liabilities of CN¥2.83m due beyond that. Offsetting this, it had CN¥750.6m in cash and CN¥172.5m in receivables that were due within 12 months. So it can boast CN¥559.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Cayi Vacuum Container could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhejiang Cayi Vacuum Container 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 Cayi Vacuum Container has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhejiang Cayi Vacuum Container'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Cayi Vacuum Container 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 Cayi Vacuum Container's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Cayi Vacuum Container has net cash of CN¥691.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 91% year-on-year EBIT growth. So we don't think Zhejiang Cayi Vacuum Container's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Zhejiang Cayi Vacuum Container you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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