Does Zenner Metering Technology (Shanghai) (SZSE:301303) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Zenner Metering Technology (Shanghai) Ltd. (SZSE:301303) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zenner Metering Technology (Shanghai)

What Is Zenner Metering Technology (Shanghai)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zenner Metering Technology (Shanghai) had CN¥324.7m of debt, an increase on CN¥36.0m, over one year. However, it does have CN¥570.0m in cash offsetting this, leading to net cash of CN¥245.3m.

A Look At Zenner Metering Technology (Shanghai)'s Liabilities

The latest balance sheet data shows that Zenner Metering Technology (Shanghai) had liabilities of CN¥807.2m due within a year, and liabilities of CN¥30.4m falling due after that. Offsetting these obligations, it had cash of CN¥570.0m as well as receivables valued at CN¥1.23b due within 12 months. So it can boast CN¥957.9m more liquid assets than total liabilities.

This excess liquidity suggests that Zenner Metering Technology (Shanghai) is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Zenner Metering Technology (Shanghai) has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Zenner Metering Technology (Shanghai) saw its EBIT decline by 5.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zenner Metering Technology (Shanghai)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zenner Metering Technology (Shanghai) 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. During the last three years, Zenner Metering Technology (Shanghai) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zenner Metering Technology (Shanghai) has net cash of CN¥245.3m, as well as more liquid assets than liabilities. So we don't have any problem with Zenner Metering Technology (Shanghai)'s use of debt. 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. Case in point: We've spotted 2 warning signs for Zenner Metering Technology (Shanghai) you should be aware of.

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.