Changzheng Engineering TechnologyLtd (SHSE:603698) Has A Rock Solid Balance Sheet

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.' 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. Importantly, Changzheng Engineering Technology Co.,Ltd (SHSE:603698) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Changzheng Engineering TechnologyLtd

What Is Changzheng Engineering TechnologyLtd's Debt?

As you can see below, at the end of June 2024, Changzheng Engineering TechnologyLtd had CN¥1.01b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥2.54b in cash, leading to a CN¥1.53b net cash position.

How Healthy Is Changzheng Engineering TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Changzheng Engineering TechnologyLtd had liabilities of CN¥2.33b due within 12 months, and liabilities of CN¥1.19b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.54b as well as receivables valued at CN¥1.67b due within 12 months. So it actually has CN¥692.8m more liquid assets than total liabilities.

This surplus suggests that Changzheng Engineering TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Changzheng Engineering TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Changzheng Engineering TechnologyLtd grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Changzheng Engineering TechnologyLtd 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 company can only pay off debt with cold hard cash, not accounting profits. Changzheng Engineering TechnologyLtd 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, Changzheng Engineering TechnologyLtd's free cash flow amounted to 39% 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 Changzheng Engineering TechnologyLtd has net cash of CN¥1.53b, as well as more liquid assets than liabilities. And we liked the look of last year's 26% year-on-year EBIT growth. So is Changzheng Engineering TechnologyLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Changzheng Engineering TechnologyLtd , and understanding them should be part of your investment process.

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.