Is Zhejiang Crystal-Optech (SZSE:002273) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Zhejiang Crystal-Optech Co., Ltd (SZSE:002273) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zhejiang Crystal-Optech

How Much Debt Does Zhejiang Crystal-Optech Carry?

The chart below, which you can click on for greater detail, shows that Zhejiang Crystal-Optech had CN¥134.2m in debt in September 2024; about the same as the year before. But it also has CN¥2.16b in cash to offset that, meaning it has CN¥2.02b net cash.

How Strong Is Zhejiang Crystal-Optech's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Crystal-Optech had liabilities of CN¥2.11b falling due within a year, and liabilities of CN¥188.7m due beyond that. Offsetting this, it had CN¥2.16b in cash and CN¥1.38b in receivables that were due within 12 months. So it can boast CN¥1.23b more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Crystal-Optech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhejiang Crystal-Optech has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Zhejiang Crystal-Optech grew its EBIT by 150% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhejiang Crystal-Optech'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Crystal-Optech 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, Zhejiang Crystal-Optech's free cash flow amounted to 30% 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 Zhejiang Crystal-Optech has CN¥2.02b in net cash and a decent-looking balance sheet. And we liked the look of last year's 150% year-on-year EBIT growth. So we don't think Zhejiang Crystal-Optech's use of debt is risky. 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. We've identified 1 warning sign with Zhejiang Crystal-Optech , and understanding them should be part of your investment process.

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.