Here's Why Zhejiang Jingsheng Mechanical & Electrical (SZSE:300316) 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.' 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 note that Zhejiang Jingsheng Mechanical & Electrical Co., Ltd. (SZSE:300316) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhejiang Jingsheng Mechanical & Electrical

How Much Debt Does Zhejiang Jingsheng Mechanical & Electrical Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang Jingsheng Mechanical & Electrical had CN¥2.30b of debt, an increase on CN¥1.71b, over one year. However, it does have CN¥3.30b in cash offsetting this, leading to net cash of CN¥996.0m.

How Healthy Is Zhejiang Jingsheng Mechanical & Electrical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Jingsheng Mechanical & Electrical had liabilities of CN¥14.2b due within 12 months and liabilities of CN¥1.41b due beyond that. Offsetting this, it had CN¥3.30b in cash and CN¥6.64b in receivables that were due within 12 months. So it has liabilities totalling CN¥5.66b more than its cash and near-term receivables, combined.

Since publicly traded Zhejiang Jingsheng Mechanical & Electrical shares are worth a total of CN¥42.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Zhejiang Jingsheng Mechanical & Electrical boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Zhejiang Jingsheng Mechanical & Electrical has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Jingsheng Mechanical & Electrical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Jingsheng Mechanical & Electrical 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 Jingsheng Mechanical & Electrical barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

Although Zhejiang Jingsheng Mechanical & Electrical'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¥996.0m. So we are not troubled with Zhejiang Jingsheng Mechanical & Electrical's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Zhejiang Jingsheng Mechanical & Electrical (1 is potentially serious!) that you should be aware of before investing here.

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.