Is Zhejiang Runtu (SZSE:002440) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Runtu Co., Ltd. (SZSE:002440) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhejiang Runtu

How Much Debt Does Zhejiang Runtu Carry?

The image below, which you can click on for greater detail, shows that Zhejiang Runtu had debt of CN¥500.4m at the end of June 2024, a reduction from CN¥1.19b over a year. However, it does have CN¥2.24b in cash offsetting this, leading to net cash of CN¥1.74b.

A Look At Zhejiang Runtu's Liabilities

The latest balance sheet data shows that Zhejiang Runtu had liabilities of CN¥1.81b due within a year, and liabilities of CN¥50.9m falling due after that. On the other hand, it had cash of CN¥2.24b and CN¥2.29b worth of receivables due within a year. So it can boast CN¥2.67b more liquid assets than total liabilities.

This luscious liquidity implies that Zhejiang Runtu's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Zhejiang Runtu has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Zhejiang Runtu grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. 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 Runtu'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. While Zhejiang Runtu has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Zhejiang Runtu's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Runtu has CN¥1.74b in net cash and a decent-looking balance sheet. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think Zhejiang Runtu'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, we've discovered 3 warning signs for Zhejiang Runtu (1 is concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.