Zhejiang ZUCH Technology (SZSE:301280) Has A Pretty 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Zhejiang ZUCH Technology Co., Ltd (SZSE:301280) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhejiang ZUCH Technology

What Is Zhejiang ZUCH Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang ZUCH Technology had debt of CN¥53.9m, up from CN¥9.39m in one year. But it also has CN¥1.10b in cash to offset that, meaning it has CN¥1.05b net cash.

How Healthy Is Zhejiang ZUCH Technology's Balance Sheet?

According to the last reported balance sheet, Zhejiang ZUCH Technology had liabilities of CN¥575.5m due within 12 months, and liabilities of CN¥20.2m due beyond 12 months. Offsetting this, it had CN¥1.10b in cash and CN¥727.0m in receivables that were due within 12 months. So it actually has CN¥1.24b more liquid assets than total liabilities.

This excess liquidity is a great indication that Zhejiang ZUCH Technology's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Zhejiang ZUCH Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Zhejiang ZUCH Technology has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang ZUCH Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Zhejiang ZUCH Technology 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. Considering the last three years, Zhejiang ZUCH Technology 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 ZUCH Technology has CN¥1.05b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 21% over the last year. So we don't think Zhejiang ZUCH Technology'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. Be aware that Zhejiang ZUCH Technology is showing 2 warning signs in our investment analysis , and 1 of those is significant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.