We Think Zhe Jiang Dali TechnologyLtd (SZSE:002214) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Zhe Jiang Dali Technology Co.,Ltd (SZSE:002214) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zhe Jiang Dali TechnologyLtd

How Much Debt Does Zhe Jiang Dali TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhe Jiang Dali TechnologyLtd had CN¥343.7m of debt, an increase on CN¥191.7m, over one year. On the flip side, it has CN¥204.3m in cash leading to net debt of about CN¥139.3m.

How Healthy Is Zhe Jiang Dali TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Zhe Jiang Dali TechnologyLtd had liabilities of CN¥393.8m due within a year, and liabilities of CN¥203.9m falling due after that. Offsetting this, it had CN¥204.3m in cash and CN¥569.6m in receivables that were due within 12 months. So it actually has CN¥176.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhe Jiang Dali TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But it is Zhe Jiang Dali TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Zhe Jiang Dali TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 28%, to CN¥179m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Zhe Jiang Dali TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥394m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zhe Jiang Dali TechnologyLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.