These 4 Measures Indicate That Zhejiang Jingsheng Mechanical & Electrical (SZSE:300316) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Zhejiang Jingsheng Mechanical & Electrical

What Is Zhejiang Jingsheng Mechanical & Electrical's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Jingsheng Mechanical & Electrical had debt of CN¥1.82b, up from CN¥1.09b in one year. But on the other hand it also has CN¥3.53b in cash, leading to a CN¥1.71b net cash position.

A Look At Zhejiang Jingsheng Mechanical & Electrical's Liabilities

According to the last reported balance sheet, Zhejiang Jingsheng Mechanical & Electrical had liabilities of CN¥18.0b due within 12 months, and liabilities of CN¥1.21b due beyond 12 months. Offsetting this, it had CN¥3.53b in cash and CN¥5.94b in receivables that were due within 12 months. So it has liabilities totalling CN¥9.72b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Zhejiang Jingsheng Mechanical & Electrical has a market capitalization of CN¥36.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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!

On top of that, Zhejiang Jingsheng Mechanical & Electrical grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. 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.

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. In the last three years, Zhejiang Jingsheng Mechanical & Electrical basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While Zhejiang Jingsheng Mechanical & Electrical does have more liabilities than liquid assets, it also has net cash of CN¥1.71b. And it impressed us with its EBIT growth of 62% 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 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.

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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.

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