Zhejiang Crystal-Optech (SZSE:002273) Seems To Use Debt Quite Sensibly

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. Importantly, Zhejiang Crystal-Optech Co., Ltd (SZSE:002273) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zhejiang Crystal-Optech

What Is Zhejiang Crystal-Optech's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Crystal-Optech had debt of CN¥132.5m, up from CN¥126.4m in one year. However, its balance sheet shows it holds CN¥2.67b in cash, so it actually has CN¥2.54b net cash.

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

Zooming in on the latest balance sheet data, we can see that Zhejiang Crystal-Optech had liabilities of CN¥1.67b due within 12 months and liabilities of CN¥188.7m due beyond that. Offsetting this, it had CN¥2.67b in cash and CN¥1.21b in receivables that were due within 12 months. So it can boast CN¥2.02b more liquid assets than total liabilities.

This surplus suggests that Zhejiang Crystal-Optech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

In addition to that, we're happy to report that Zhejiang Crystal-Optech has boosted its EBIT by 54%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhejiang Crystal-Optech 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. While Zhejiang Crystal-Optech 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. Considering the last three years, Zhejiang Crystal-Optech actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Crystal-Optech has CN¥2.54b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 54% over the last year. So we are not troubled with Zhejiang Crystal-Optech's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Zhejiang Crystal-Optech you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com