Would Zhejiang Huatong Meat Products (SZSE:002840) Be Better Off With Less Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Zhejiang Huatong Meat Products Co., Ltd. (SZSE:002840) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zhejiang Huatong Meat Products

How Much Debt Does Zhejiang Huatong Meat Products Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Zhejiang Huatong Meat Products had CN¥4.79b of debt, an increase on CN¥4.15b, over one year. On the flip side, it has CN¥684.9m in cash leading to net debt of about CN¥4.10b.

A Look At Zhejiang Huatong Meat Products' Liabilities

We can see from the most recent balance sheet that Zhejiang Huatong Meat Products had liabilities of CN¥3.08b falling due within a year, and liabilities of CN¥3.39b due beyond that. On the other hand, it had cash of CN¥684.9m and CN¥106.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.68b.

This deficit isn't so bad because Zhejiang Huatong Meat Products is worth CN¥11.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Huatong Meat Products's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Zhejiang Huatong Meat Products reported revenue of CN¥9.2b, which is a gain of 8.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Zhejiang Huatong Meat Products had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥167m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥643m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Zhejiang Huatong Meat Products that you should be aware of before investing here.

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.