Zhejiang Huangma TechnologyLtd (SHSE:603181) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Huangma Technology Co.,Ltd (SHSE:603181) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhejiang Huangma TechnologyLtd

How Much Debt Does Zhejiang Huangma TechnologyLtd Carry?

As you can see below, at the end of June 2024, Zhejiang Huangma TechnologyLtd had CN¥377.9m of debt, up from CN¥353.0m a year ago. Click the image for more detail. But it also has CN¥620.8m in cash to offset that, meaning it has CN¥242.9m net cash.

A Look At Zhejiang Huangma TechnologyLtd's Liabilities

The latest balance sheet data shows that Zhejiang Huangma TechnologyLtd had liabilities of CN¥461.6m due within a year, and liabilities of CN¥254.8m falling due after that. On the other hand, it had cash of CN¥620.8m and CN¥376.3m worth of receivables due within a year. So it actually has CN¥280.7m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Huangma TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Huangma TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Zhejiang Huangma TechnologyLtd grew its EBIT by 98% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Huangma TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Huangma TechnologyLtd 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. In the last three years, Zhejiang Huangma TechnologyLtd's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Huangma TechnologyLtd has net cash of CN¥242.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 98% over the last year. So is Zhejiang Huangma TechnologyLtd's debt a risk? It doesn't seem so to us. 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, we've discovered 1 warning sign for Zhejiang Huangma TechnologyLtd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.