Is Zhejiang JIULI Hi-tech MetalsLtd (SZSE:002318) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Zhejiang JIULI Hi-tech Metals Co.,Ltd (SZSE:002318) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 JIULI Hi-tech MetalsLtd

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

As you can see below, Zhejiang JIULI Hi-tech MetalsLtd had CN¥953.3m of debt at June 2024, down from CN¥1.05b a year prior. But on the other hand it also has CN¥3.39b in cash, leading to a CN¥2.43b net cash position.

How Strong Is Zhejiang JIULI Hi-tech MetalsLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang JIULI Hi-tech MetalsLtd had liabilities of CN¥5.05b due within 12 months, and liabilities of CN¥404.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.39b as well as receivables valued at CN¥1.87b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥203.6m.

This state of affairs indicates that Zhejiang JIULI Hi-tech MetalsLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥20.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Zhejiang JIULI Hi-tech MetalsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Zhejiang JIULI Hi-tech MetalsLtd has boosted its EBIT by 66%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhejiang JIULI Hi-tech MetalsLtd 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 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 59% 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

We could understand if investors are concerned about Zhejiang JIULI Hi-tech MetalsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.43b. And we liked the look of last year's 66% year-on-year EBIT growth. So we don't think Zhejiang JIULI Hi-tech MetalsLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Zhejiang JIULI Hi-tech MetalsLtd has 1 warning sign we think you should be aware of.

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.