We Think Zhejiang Dragon Technology (SHSE:603004) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dragon Technology Co., Ltd. (SHSE:603004) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zhejiang Dragon Technology

How Much Debt Does Zhejiang Dragon Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhejiang Dragon Technology had CN¥60.1m of debt, an increase on CN¥53.6m, over one year. But on the other hand it also has CN¥1.19b in cash, leading to a CN¥1.13b net cash position.

How Strong Is Zhejiang Dragon Technology's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Dragon Technology had liabilities of CN¥197.6m falling due within a year, and liabilities of CN¥60.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.19b as well as receivables valued at CN¥153.7m due within 12 months. So it actually has CN¥1.09b more liquid assets than total liabilities.

It's good to see that Zhejiang Dragon Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Zhejiang Dragon Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Zhejiang Dragon Technology has increased its EBIT by 9.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zhejiang Dragon Technology will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Dragon Technology 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. In the last three years, Zhejiang Dragon Technology's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Dragon Technology has net cash of CN¥1.13b, as well as more liquid assets than liabilities. And it also grew its EBIT by 9.8% over the last year. So is Zhejiang Dragon Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Zhejiang Dragon Technology that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com