We Think Zhuzhou Times New Material Technology (SHSE:600458) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Zhuzhou Times New Material Technology Co., Ltd. (SHSE:600458) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Zhuzhou Times New Material Technology

What Is Zhuzhou Times New Material Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zhuzhou Times New Material Technology had CN¥899.5m of debt in September 2024, down from CN¥1.73b, one year before. But on the other hand it also has CN¥1.62b in cash, leading to a CN¥717.1m net cash position.

A Look At Zhuzhou Times New Material Technology's Liabilities

According to the last reported balance sheet, Zhuzhou Times New Material Technology had liabilities of CN¥12.1b due within 12 months, and liabilities of CN¥2.09b due beyond 12 months. Offsetting this, it had CN¥1.62b in cash and CN¥9.47b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.08b.

This deficit isn't so bad because Zhuzhou Times New Material Technology is worth CN¥11.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Zhuzhou Times New Material Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Zhuzhou Times New Material Technology grew its EBIT by 106% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhuzhou Times New Material Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhuzhou Times New Material Technology 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. Considering the last three years, Zhuzhou Times New Material Technology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While Zhuzhou Times New Material Technology does have more liabilities than liquid assets, it also has net cash of CN¥717.1m. And we liked the look of last year's 106% year-on-year EBIT growth. So we are not troubled with Zhuzhou Times New Material Technology's debt use. 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. For example - Zhuzhou Times New Material Technology has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.