Zhejiang Century Huatong GroupLtd (SZSE:002602) Could Easily Take On More Debt

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 note that Zhejiang Century Huatong Group Co.,Ltd (SZSE:002602) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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.

View our latest analysis for Zhejiang Century Huatong GroupLtd

What Is Zhejiang Century Huatong GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Zhejiang Century Huatong GroupLtd had debt of CN¥4.25b, up from CN¥3.49b in one year. However, its balance sheet shows it holds CN¥5.29b in cash, so it actually has CN¥1.04b net cash.

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¥10.5b due within a year, and liabilities of CN¥1.81b falling due after that. Offsetting these obligations, it had cash of CN¥5.29b as well as receivables valued at CN¥4.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.77b.

Since publicly traded Zhejiang Century Huatong GroupLtd shares are worth a total of CN¥34.4b, 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. 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.

In addition to that, we're happy to report that Zhejiang Century Huatong GroupLtd has boosted its EBIT by 87%, thus reducing the spectre of future debt repayments. 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.

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 it is always sensible to look at a company's total liabilities, it is very reassuring that Zhejiang Century Huatong GroupLtd has CN¥1.04b in net cash. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in CN¥2.9b. So we don't think Zhejiang Century Huatong GroupLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Zhejiang Century Huatong GroupLtd has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.