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

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zhejiang Lante Optics Co., Ltd. (SHSE:688127) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhejiang Lante Optics

What Is Zhejiang Lante Optics's Net Debt?

As you can see below, Zhejiang Lante Optics had CN¥66.1m of debt at September 2024, down from CN¥217.6m a year prior. However, its balance sheet shows it holds CN¥224.7m in cash, so it actually has CN¥158.6m net cash.

How Healthy Is Zhejiang Lante Optics' Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Lante Optics had liabilities of CN¥365.4m falling due within a year, and liabilities of CN¥123.4m due beyond that. On the other hand, it had cash of CN¥224.7m and CN¥290.7m worth of receivables due within a year. So it can boast CN¥26.5m 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 it's very unlikely that the CN¥10.0b company is short on cash, but still worth keeping an eye on the 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.

Even more impressive was the fact that Zhejiang Lante Optics grew its EBIT by 249% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Zhejiang Lante Optics 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Lante Optics 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. During the last three years, Zhejiang Lante Optics burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far 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¥158.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 249% year-on-year EBIT growth. So we don't have any problem with Zhejiang Lante Optics's use of debt. 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. For instance, we've identified 1 warning sign for Zhejiang Lante Optics that you should be aware of.

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.