We Think Zhejiang Century Huatong GroupLtd (SZSE:002602) 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 Century Huatong Group Co.,Ltd (SZSE:002602) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhejiang Century Huatong GroupLtd

What Is Zhejiang Century Huatong GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Zhejiang Century Huatong GroupLtd had CN¥1.03b of debt in March 2024, down from CN¥3.65b, one year before. However, it does have CN¥3.74b in cash offsetting this, leading to net cash of CN¥2.71b.

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¥8.68b due within a year, and liabilities of CN¥2.78b falling due after that. Offsetting this, it had CN¥3.74b in cash and CN¥3.80b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.93b.

Of course, Zhejiang Century Huatong GroupLtd has a market capitalization of CN¥27.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Zhejiang Century Huatong GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Zhejiang Century Huatong GroupLtd grew its EBIT by 150% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Century Huatong GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Zhejiang Century Huatong GroupLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Zhejiang Century Huatong GroupLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥2.71b. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in CN¥2.6b. So is Zhejiang Century Huatong GroupLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhejiang Century Huatong GroupLtd's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.