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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Ziel Home Furnishing Technology Co., Ltd. (SZSE:301376) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ziel Home Furnishing Technology

What Is Ziel Home Furnishing Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ziel Home Furnishing Technology had CN¥891.7m of debt in March 2024, down from CN¥1.19b, one year before. However, its balance sheet shows it holds CN¥1.18b in cash, so it actually has CN¥286.0m net cash.

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

Zooming in on the latest balance sheet data, we can see that Ziel Home Furnishing Technology had liabilities of CN¥1.80b due within 12 months and liabilities of CN¥713.0m due beyond that. On the other hand, it had cash of CN¥1.18b and CN¥423.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥911.5m.

Since publicly traded Ziel Home Furnishing Technology shares are worth a total of CN¥7.14b, 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. 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.

On top of that, Ziel Home Furnishing Technology grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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

While Ziel Home Furnishing Technology does have more liabilities than liquid assets, it also has net cash of CN¥286.0m. The cherry on top was that in converted 293% of that EBIT to free cash flow, bringing in CN¥1.7b. So we don't think Ziel Home Furnishing Technology's use of debt is risky. 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 Ziel Home Furnishing Technology you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com