These 4 Measures Indicate That Zhejiang Dongri Limited (SHSE:600113) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Zhejiang Dongri Limited Company (SHSE:600113) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhejiang Dongri Limited

What Is Zhejiang Dongri Limited's Debt?

The image below, which you can click on for greater detail, shows that Zhejiang Dongri Limited had debt of CN¥274.8m at the end of September 2024, a reduction from CN¥343.9m over a year. However, it does have CN¥759.9m in cash offsetting this, leading to net cash of CN¥485.1m.

How Healthy Is Zhejiang Dongri Limited's Balance Sheet?

The latest balance sheet data shows that Zhejiang Dongri Limited had liabilities of CN¥760.2m due within a year, and liabilities of CN¥290.0m falling due after that. Offsetting these obligations, it had cash of CN¥759.9m as well as receivables valued at CN¥134.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥156.2m.

Of course, Zhejiang Dongri Limited has a market capitalization of CN¥5.51b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Zhejiang Dongri Limited also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Zhejiang Dongri Limited grew its EBIT by 14% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhejiang Dongri Limited's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Dongri Limited 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. Over the last three years, Zhejiang Dongri Limited reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Zhejiang Dongri Limited's liabilities, but we can be reassured by the fact it has has net cash of CN¥485.1m. On top of that, it increased its EBIT by 14% in the last twelve months. So we are not troubled with Zhejiang Dongri Limited's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Zhejiang Dongri Limited , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.