Zhejiang Hengtong HoldingLtd (SHSE:600226) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Zhejiang Hengtong Holding Co.,Ltd. (SHSE:600226) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zhejiang Hengtong HoldingLtd

How Much Debt Does Zhejiang Hengtong HoldingLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhejiang Hengtong HoldingLtd had CN¥335.1m of debt, an increase on CN¥89.0m, over one year. However, its balance sheet shows it holds CN¥943.7m in cash, so it actually has CN¥608.6m net cash.

A Look At Zhejiang Hengtong HoldingLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Hengtong HoldingLtd had liabilities of CN¥412.2m due within 12 months and liabilities of CN¥403.2m due beyond that. Offsetting these obligations, it had cash of CN¥943.7m as well as receivables valued at CN¥159.7m due within 12 months. So it can boast CN¥288.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Hengtong HoldingLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Hengtong HoldingLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Zhejiang Hengtong HoldingLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥37m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang Hengtong HoldingLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Hengtong HoldingLtd 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. During the last year, Zhejiang Hengtong HoldingLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Hengtong HoldingLtd has net cash of CN¥608.6m, as well as more liquid assets than liabilities. So we don't have any problem with Zhejiang Hengtong HoldingLtd's use of debt. 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 Zhejiang Hengtong HoldingLtd , 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.