Here's Why Zhejiang Huace Film & TV (SZSE:300133) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Zhejiang Huace Film & TV Co., Ltd. (SZSE:300133) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhejiang Huace Film & TV

What Is Zhejiang Huace Film & TV's Net Debt?

The image below, which you can click on for greater detail, shows that Zhejiang Huace Film & TV had debt of CN¥561.1m at the end of September 2024, a reduction from CN¥994.7m over a year. But it also has CN¥3.90b in cash to offset that, meaning it has CN¥3.34b net cash.

A Look At Zhejiang Huace Film & TV's Liabilities

The latest balance sheet data shows that Zhejiang Huace Film & TV had liabilities of CN¥2.39b due within a year, and liabilities of CN¥142.1m falling due after that. Offsetting this, it had CN¥3.90b in cash and CN¥785.8m in receivables that were due within 12 months. So it actually has CN¥2.15b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Huace Film & TV has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Huace Film & TV boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Zhejiang Huace Film & TV's load is not too heavy, because its EBIT was down 74% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang Huace Film & TV's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhejiang Huace Film & TV 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. Over the last three years, Zhejiang Huace Film & TV reported free cash flow worth 3.3% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Huace Film & TV has net cash of CN¥3.34b, as well as more liquid assets than liabilities. So we are not troubled with Zhejiang Huace Film & TV's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Zhejiang Huace Film & TV you should be aware of.

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.