Zhejiang Huatong Meat Products (SZSE:002840) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Zhejiang Huatong Meat Products Co., Ltd. (SZSE:002840) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. 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?

As you can see below, at the end of March 2024, Zhejiang Huatong Meat Products had CN¥5.17b of debt, up from CN¥4.33b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥751.6m, its net debt is less, at about CN¥4.42b.

How Healthy Is Zhejiang Huatong Meat Products' Balance Sheet?

According to the last reported balance sheet, Zhejiang Huatong Meat Products had liabilities of CN¥3.69b due within 12 months, and liabilities of CN¥3.36b due beyond 12 months. Offsetting this, it had CN¥751.6m in cash and CN¥163.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥6.13b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥9.16b, so it does suggest shareholders should keep an eye on Zhejiang Huatong Meat Products' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Zhejiang Huatong Meat Products had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥8.6b. We would much prefer see growth.

Caveat Emptor

Not only did Zhejiang Huatong Meat Products's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥503m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥631m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zhejiang Huatong Meat Products you should know about.

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.

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