These 4 Measures Indicate That Zhejiang Century Huatong GroupLtd (SZSE:002602) Is Using Debt Safely

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 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. We can see that Zhejiang Century Huatong Group Co.,Ltd (SZSE:002602) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Zhejiang Century Huatong GroupLtd

What Is Zhejiang Century Huatong GroupLtd's Debt?

The chart below, which you can click on for greater detail, shows that Zhejiang Century Huatong GroupLtd had CN¥3.45b in debt in June 2024; about the same as the year before. But on the other hand it also has CN¥4.48b in cash, leading to a CN¥1.03b net cash position.

How Healthy Is Zhejiang Century Huatong GroupLtd's Balance Sheet?

The latest balance sheet data shows that Zhejiang Century Huatong GroupLtd had liabilities of CN¥9.51b due within a year, and liabilities of CN¥2.27b falling due after that. Offsetting this, it had CN¥4.48b in cash and CN¥3.95b in receivables that were due within 12 months. So its liabilities total CN¥3.35b more than the combination of its cash and short-term receivables.

Since publicly traded Zhejiang Century Huatong GroupLtd shares are worth a total of CN¥24.6b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Zhejiang Century Huatong GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Zhejiang Century Huatong GroupLtd grew its EBIT by 104% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Century Huatong GroupLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Century Huatong GroupLtd 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. Over the last three years, Zhejiang Century Huatong GroupLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Zhejiang Century Huatong GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.03b. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in CN¥2.5b. So we don't think Zhejiang Century Huatong GroupLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Zhejiang Century Huatong GroupLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.