These 4 Measures Indicate That Ziel Home Furnishing Technology (SZSE:301376) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Ziel Home Furnishing Technology Co., Ltd. (SZSE:301376) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ziel Home Furnishing Technology

What Is Ziel Home Furnishing Technology's Net Debt?

As you can see below, at the end of September 2023, Ziel Home Furnishing Technology had CN¥690.5m of debt, up from CN¥341.0m a year ago. Click the image for more detail. But it also has CN¥1.46b in cash to offset that, meaning it has CN¥768.0m net cash.

How Strong Is Ziel Home Furnishing Technology's Balance Sheet?

We can see from the most recent balance sheet that Ziel Home Furnishing Technology had liabilities of CN¥1.41b falling due within a year, and liabilities of CN¥668.6m due beyond that. Offsetting this, it had CN¥1.46b in cash and CN¥359.3m in receivables that were due within 12 months. So its liabilities total CN¥261.4m more than the combination of its cash and short-term receivables.

Given Ziel Home Furnishing Technology has a market capitalization of CN¥8.84b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Ziel Home Furnishing Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Ziel Home Furnishing Technology has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ziel Home Furnishing Technology 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ziel Home Furnishing Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Ziel Home Furnishing Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Ziel Home Furnishing Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥768.0m. And it impressed us with free cash flow of CN¥1.5b, being 223% of its EBIT. So we don't think Ziel Home Furnishing Technology's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Ziel Home Furnishing Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.