Is Zhejiang Great SoutheastLtd (SZSE:002263) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Zhejiang Great Southeast Corp.Ltd (SZSE:002263) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Zhejiang Great SoutheastLtd

What Is Zhejiang Great SoutheastLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhejiang Great SoutheastLtd had CN¥222.4m of debt, an increase on CN¥139.7m, over one year. However, it does have CN¥1.18b in cash offsetting this, leading to net cash of CN¥952.9m.

How Healthy Is Zhejiang Great SoutheastLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Great SoutheastLtd had liabilities of CN¥364.3m due within 12 months and liabilities of CN¥51.3m due beyond that. Offsetting this, it had CN¥1.18b in cash and CN¥264.9m in receivables that were due within 12 months. So it can boast CN¥1.02b more liquid assets than total liabilities.

This excess liquidity suggests that Zhejiang Great SoutheastLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Zhejiang Great SoutheastLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Great SoutheastLtd 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.

In the last year Zhejiang Great SoutheastLtd had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥1.3b. That's not what we would hope to see.

So How Risky Is Zhejiang Great SoutheastLtd?

Although Zhejiang Great SoutheastLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥4.7m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhejiang Great SoutheastLtd you should know about.

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.