Is Zhejiang JIULI Hi-tech MetalsLtd (SZSE:002318) A Risky Investment?

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.' 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 JIULI Hi-tech Metals Co.,Ltd (SZSE:002318) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zhejiang JIULI Hi-tech MetalsLtd

What Is Zhejiang JIULI Hi-tech MetalsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Zhejiang JIULI Hi-tech MetalsLtd had debt of CN¥793.7m at the end of September 2024, a reduction from CN¥1.15b over a year. However, it does have CN¥3.37b in cash offsetting this, leading to net cash of CN¥2.58b.

A Look At Zhejiang JIULI Hi-tech MetalsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang JIULI Hi-tech MetalsLtd had liabilities of CN¥5.73b due within 12 months and liabilities of CN¥403.7m due beyond that. Offsetting this, it had CN¥3.37b in cash and CN¥1.93b in receivables that were due within 12 months. So its liabilities total CN¥831.4m more than the combination of its cash and short-term receivables.

Given Zhejiang JIULI Hi-tech MetalsLtd has a market capitalization of CN¥23.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Zhejiang JIULI Hi-tech MetalsLtd 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 JIULI Hi-tech MetalsLtd has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhejiang JIULI Hi-tech MetalsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zhejiang JIULI Hi-tech MetalsLtd 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. Over the most recent three years, Zhejiang JIULI Hi-tech MetalsLtd recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Zhejiang JIULI Hi-tech MetalsLtd has CN¥2.58b in net cash. And it impressed us with its EBIT growth of 48% over the last year. So we don't think Zhejiang JIULI Hi-tech MetalsLtd's use of debt is risky. 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. For instance, we've identified 1 warning sign for Zhejiang JIULI Hi-tech MetalsLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.