Is Zhejiang Jingsheng Mechanical & Electrical (SZSE:300316) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Zhejiang Jingsheng Mechanical & Electrical Co., Ltd. (SZSE:300316) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at 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 June 2024 Zhejiang Jingsheng Mechanical & Electrical had CN¥2.00b of debt, an increase on CN¥1.69b, over one year. However, its balance sheet shows it holds CN¥2.93b in cash, so it actually has CN¥935.8m net cash.

A Look At Zhejiang Jingsheng Mechanical & Electrical's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Jingsheng Mechanical & Electrical had liabilities of CN¥15.5b due within 12 months and liabilities of CN¥1.43b due beyond that. On the other hand, it had cash of CN¥2.93b and CN¥6.68b worth of receivables due within a year. So it has liabilities totalling CN¥7.32b more than its cash and near-term receivables, combined.

Given Zhejiang Jingsheng Mechanical & Electrical has a market capitalization of CN¥44.3b, it's hard to believe these liabilities pose much 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 Jingsheng Mechanical & Electrical boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Zhejiang Jingsheng Mechanical & Electrical has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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. 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 recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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¥935.8m. And it impressed us with its EBIT growth of 25% over the last year. So we are not troubled with Zhejiang Jingsheng Mechanical & Electrical's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Zhejiang Jingsheng Mechanical & Electrical (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.