Stock Analysis

China Zhenhua (Group) Science & Technology (SZSE:000733) Has A Pretty Healthy Balance Sheet

SZSE:000733
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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 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, China Zhenhua (Group) Science & Technology Co., Ltd (SZSE:000733) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Zhenhua (Group) Science & Technology

What Is China Zhenhua (Group) Science & Technology's Net Debt?

The image below, which you can click on for greater detail, shows that China Zhenhua (Group) Science & Technology had debt of CN¥1.12b at the end of June 2024, a reduction from CN¥1.41b over a year. However, it does have CN¥4.84b in cash offsetting this, leading to net cash of CN¥3.73b.

debt-equity-history-analysis
SZSE:000733 Debt to Equity History October 24th 2024

A Look At China Zhenhua (Group) Science & Technology's Liabilities

We can see from the most recent balance sheet that China Zhenhua (Group) Science & Technology had liabilities of CN¥2.11b falling due within a year, and liabilities of CN¥1.32b due beyond that. On the other hand, it had cash of CN¥4.84b and CN¥6.51b worth of receivables due within a year. So it actually has CN¥7.93b more liquid assets than total liabilities.

It's good to see that China Zhenhua (Group) Science & Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, China Zhenhua (Group) Science & Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for China Zhenhua (Group) Science & Technology if management cannot prevent a repeat of the 46% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Zhenhua (Group) Science & Technology 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, a company can only pay off debt with cold hard cash, not accounting profits. China Zhenhua (Group) Science & Technology 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. In the last three years, China Zhenhua (Group) Science & Technology's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Zhenhua (Group) Science & Technology has CN¥3.73b in net cash and a decent-looking balance sheet. So we are not troubled with China Zhenhua (Group) Science & Technology's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for China Zhenhua (Group) Science & Technology 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.