Is Zhe Jiang KangshengLtd (SZSE:002418) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Zhe Jiang Kangsheng Co.,Ltd. (SZSE:002418) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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 Zhe Jiang KangshengLtd

What Is Zhe Jiang KangshengLtd's Net Debt?

As you can see below, Zhe Jiang KangshengLtd had CN¥412.2m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥170.0m in cash, and so its net debt is CN¥242.2m.

How Healthy Is Zhe Jiang KangshengLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhe Jiang KangshengLtd had liabilities of CN¥836.2m due within 12 months and liabilities of CN¥184.2m due beyond that. Offsetting these obligations, it had cash of CN¥170.0m as well as receivables valued at CN¥1.12b due within 12 months. So it can boast CN¥274.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhe Jiang KangshengLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhe Jiang KangshengLtd 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, Zhe Jiang KangshengLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.4b, which is a fall of 10%. That's not what we would hope to see.

Caveat Emptor

Not only did Zhe Jiang KangshengLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥791k. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. To that end, you should be aware of the 1 warning sign we've spotted with Zhe Jiang KangshengLtd .

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.