Is Zhejiang Great SoutheastLtd (SZSE:002263) Weighed On By Its Debt Load?

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.' 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. As with many other companies Zhejiang Great Southeast Corp.Ltd (SZSE:002263) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zhejiang Great SoutheastLtd

How Much Debt Does Zhejiang Great SoutheastLtd Carry?

As you can see below, Zhejiang Great SoutheastLtd had CN¥14.5m of debt at June 2024, down from CN¥155.4m a year prior. However, it does have CN¥967.4m in cash offsetting this, leading to net cash of CN¥952.9m.

How Healthy Is Zhejiang Great SoutheastLtd's Balance Sheet?

The latest balance sheet data shows that Zhejiang Great SoutheastLtd had liabilities of CN¥107.9m due within a year, and liabilities of CN¥49.9m falling due after that. On the other hand, it had cash of CN¥967.4m and CN¥277.6m worth of receivables due within a year. So it actually has CN¥1.09b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Great SoutheastLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any 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.

Over 12 months, Zhejiang Great SoutheastLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 5.9%. We would much prefer see growth.

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 generated positive free cash flow of CN¥174m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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. To that end, you should be aware of the 1 warning sign we've spotted with Zhejiang Great SoutheastLtd .

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.