Does Zhejiang HugeleafLtd (SHSE:600226) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zhejiang Hugeleaf Co.,Ltd. (SHSE:600226) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhejiang HugeleafLtd

How Much Debt Does Zhejiang HugeleafLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Zhejiang HugeleafLtd had CN¥210.6m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥820.4m in cash, so it actually has CN¥609.8m net cash.

How Strong Is Zhejiang HugeleafLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang HugeleafLtd had liabilities of CN¥198.6m due within 12 months, and liabilities of CN¥236.1m due beyond 12 months. On the other hand, it had cash of CN¥820.4m and CN¥110.6m worth of receivables due within a year. So it can boast CN¥496.3m more liquid assets than total liabilities.

This surplus suggests that Zhejiang HugeleafLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhejiang HugeleafLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhejiang HugeleafLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhejiang HugeleafLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Zhejiang HugeleafLtd?

While Zhejiang HugeleafLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥102m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for Zhejiang HugeleafLtd you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.