We Think Zhejiang Runtu (SZSE:002440) Can Manage Its Debt With Ease

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Zhejiang Runtu Co., Ltd. (SZSE:002440) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Zhejiang Runtu

What Is Zhejiang Runtu's Debt?

As you can see below, Zhejiang Runtu had CN¥500.4m of debt at September 2024, down from CN¥687.3m a year prior. But on the other hand it also has CN¥2.16b in cash, leading to a CN¥1.66b net cash position.

How Healthy Is Zhejiang Runtu's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Runtu had liabilities of CN¥1.88b falling due within a year, and liabilities of CN¥55.7m due beyond that. Offsetting these obligations, it had cash of CN¥2.16b as well as receivables valued at CN¥2.52b due within 12 months. So it can boast CN¥2.75b 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.

Better yet, Zhejiang Runtu grew its EBIT by 11,375% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Runtu has net cash of CN¥1.66b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 11,375% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Zhejiang Runtu you should be aware of, and 1 of them is significant.

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.