China Zhenhua (Group) Science & Technology (SZSE:000733) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that China Zhenhua (Group) Science & Technology Co., Ltd (SZSE:000733) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 chart below, which you can click on for greater detail, shows that China Zhenhua (Group) Science & Technology had CN¥1.28b in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥4.71b in cash, leading to a CN¥3.42b net cash position.

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

Zooming in on the latest balance sheet data, we can see that China Zhenhua (Group) Science & Technology had liabilities of CN¥2.13b due within 12 months and liabilities of CN¥1.36b due beyond that. On the other hand, it had cash of CN¥4.71b and CN¥7.11b worth of receivables due within a year. So it actually has CN¥8.31b more liquid assets than total liabilities.

This surplus liquidity suggests that China Zhenhua (Group) Science & Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that China Zhenhua (Group) Science & Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for China Zhenhua (Group) Science & Technology if management cannot prevent a repeat of the 23% 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine China Zhenhua (Group) Science & Technology'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, 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 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Zhenhua (Group) Science & Technology has net cash of CN¥3.42b, as well as more liquid assets than liabilities. So we don't have any problem with China Zhenhua (Group) Science & Technology's use of debt. 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 instance, we've identified 2 warning signs for China Zhenhua (Group) Science & Technology 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.