Is Zhejiang Zhongke Magnetic Industry (SZSE:301141) Using Debt Sensibly?

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.' 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. We can see that Zhejiang Zhongke Magnetic Industry Co., Ltd. (SZSE:301141) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Zhejiang Zhongke Magnetic Industry

How Much Debt Does Zhejiang Zhongke Magnetic Industry Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Zhejiang Zhongke Magnetic Industry had debt of CN¥11.3m, up from CN¥4.89m in one year. However, its balance sheet shows it holds CN¥686.0m in cash, so it actually has CN¥674.7m net cash.

How Healthy Is Zhejiang Zhongke Magnetic Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Zhongke Magnetic Industry had liabilities of CN¥177.8m due within 12 months and liabilities of CN¥14.9m due beyond that. Offsetting this, it had CN¥686.0m in cash and CN¥246.8m in receivables that were due within 12 months. So it can boast CN¥740.2m more liquid assets than total liabilities.

It's good to see that Zhejiang Zhongke Magnetic Industry has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Zhejiang Zhongke Magnetic Industry boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang Zhongke Magnetic Industry's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhejiang Zhongke Magnetic Industry had a loss before interest and tax, and actually shrunk its revenue by 2.1%, to CN¥487m. We would much prefer see growth.

So How Risky Is Zhejiang Zhongke Magnetic Industry?

Although Zhejiang Zhongke Magnetic Industry had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥28m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 instance, we've identified 4 warning signs for Zhejiang Zhongke Magnetic Industry (2 don't sit too well with us) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.