Does Zhejiang Lante Optics (SHSE:688127) Have A Healthy Balance Sheet?

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 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 can see that Zhejiang Lante Optics Co., Ltd. (SHSE:688127) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Lante Optics

How Much Debt Does Zhejiang Lante Optics Carry?

As you can see below, at the end of March 2024, Zhejiang Lante Optics had CN¥244.7m of debt, up from CN¥119.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥457.8m in cash, leading to a CN¥213.1m net cash position.

How Strong Is Zhejiang Lante Optics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Lante Optics had liabilities of CN¥492.8m due within 12 months and liabilities of CN¥102.6m due beyond that. Offsetting this, it had CN¥457.8m in cash and CN¥166.1m in receivables that were due within 12 months. So it can boast CN¥28.4m more liquid assets than total liabilities.

This state of affairs indicates that Zhejiang Lante Optics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.05b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Zhejiang Lante Optics has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Zhejiang Lante Optics grew its EBIT by 2,804% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Lante Optics'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhejiang Lante Optics 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 Lante Optics saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Lante Optics has net cash of CN¥213.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 2,804% over the last year. So we are not troubled with Zhejiang Lante Optics'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhejiang Lante Optics (of which 1 shouldn't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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