Does China Zhenhua (Group) Science & Technology (SZSE:000733) Have A Healthy Balance Sheet?

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 can see that China Zhenhua (Group) Science & Technology Co., Ltd (SZSE:000733) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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¥995.1m at the end of September 2024, a reduction from CN¥1.39b over a year. However, it does have CN¥4.75b in cash offsetting this, leading to net cash of CN¥3.76b.

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

According to the last reported balance sheet, China Zhenhua (Group) Science & Technology had liabilities of CN¥2.01b due within 12 months, and liabilities of CN¥1.26b due beyond 12 months. Offsetting this, it had CN¥4.75b in cash and CN¥6.70b in receivables that were due within 12 months. So it actually has CN¥8.19b more liquid assets than total liabilities.

This surplus strongly suggests that China Zhenhua (Group) Science & Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 55% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China Zhenhua (Group) Science & Technology 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, China Zhenhua (Group) Science & Technology's free cash flow amounted to 38% 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¥3.76b, as well as more liquid assets than liabilities. 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. For example, we've discovered 1 warning sign for China Zhenhua (Group) Science & Technology that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.