Zhejiang Wellsun Intelligent TechnologyLtd (SZSE:300882) Seems To Use Debt Rather Sparingly

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 note that Zhejiang Wellsun Intelligent Technology Co.,Ltd. (SZSE:300882) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhejiang Wellsun Intelligent TechnologyLtd

What Is Zhejiang Wellsun Intelligent TechnologyLtd's Debt?

As you can see below, at the end of March 2024, Zhejiang Wellsun Intelligent TechnologyLtd had CN¥30.0m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥751.9m in cash offsetting this, leading to net cash of CN¥721.9m.

A Look At Zhejiang Wellsun Intelligent TechnologyLtd's Liabilities

The latest balance sheet data shows that Zhejiang Wellsun Intelligent TechnologyLtd had liabilities of CN¥372.6m due within a year, and liabilities of CN¥21.2m falling due after that. On the other hand, it had cash of CN¥751.9m and CN¥328.3m worth of receivables due within a year. So it actually has CN¥686.5m more liquid assets than total liabilities.

It's good to see that Zhejiang Wellsun Intelligent TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Zhejiang Wellsun Intelligent TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Zhejiang Wellsun Intelligent TechnologyLtd grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhejiang Wellsun Intelligent TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Wellsun Intelligent TechnologyLtd 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. Over the most recent three years, Zhejiang Wellsun Intelligent TechnologyLtd recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Wellsun Intelligent TechnologyLtd has CN¥721.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 58% year-on-year EBIT growth. So we don't think Zhejiang Wellsun Intelligent TechnologyLtd's use of debt is risky. 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 2 warning signs for Zhejiang Wellsun Intelligent 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.

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