Zhejiang Huangma TechnologyLtd (SHSE:603181) Seems To Use Debt Rather Sparingly

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. We note that Zhejiang Huangma Technology Co.,Ltd (SHSE:603181) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhejiang Huangma TechnologyLtd

What Is Zhejiang Huangma TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang Huangma TechnologyLtd had CN¥396.6m of debt, an increase on CN¥367.0m, over one year. However, it does have CN¥642.3m in cash offsetting this, leading to net cash of CN¥245.7m.

A Look At Zhejiang Huangma TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Huangma TechnologyLtd had liabilities of CN¥432.6m due within 12 months and liabilities of CN¥272.0m due beyond that. On the other hand, it had cash of CN¥642.3m and CN¥401.8m worth of receivables due within a year. So it actually has CN¥339.5m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Zhejiang Huangma TechnologyLtd has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Huangma TechnologyLtd 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 Huangma TechnologyLtd's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Huangma TechnologyLtd has CN¥245.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 80% year-on-year EBIT growth. So is Zhejiang Huangma TechnologyLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Zhejiang Huangma TechnologyLtd .

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.