These 4 Measures Indicate That Zhejiang JIULI Hi-tech MetalsLtd (SZSE:002318) Is Using Debt Safely

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Zhejiang JIULI Hi-tech Metals Co.,Ltd (SZSE:002318) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zhejiang JIULI Hi-tech MetalsLtd

How Much Debt Does Zhejiang JIULI Hi-tech MetalsLtd Carry?

As you can see below, at the end of March 2024, Zhejiang JIULI Hi-tech MetalsLtd had CN¥923.2m of debt, up from CN¥824.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.93b in cash, so it actually has CN¥3.01b net cash.

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

We can see from the most recent balance sheet that Zhejiang JIULI Hi-tech MetalsLtd had liabilities of CN¥4.98b falling due within a year, and liabilities of CN¥401.7m due beyond that. On the other hand, it had cash of CN¥3.93b and CN¥1.88b worth of receivables due within a year. So it can boast CN¥439.2m more liquid assets than total liabilities.

Having regard to Zhejiang JIULI Hi-tech MetalsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥23.2b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, 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 57%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.

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 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang JIULI Hi-tech MetalsLtd has CN¥3.01b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 57% over the last year. So we don't think Zhejiang JIULI Hi-tech MetalsLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Zhejiang JIULI Hi-tech MetalsLtd you should be aware of.

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.