Here's Why Zhongtian Construction (Hunan) Group (HKG:2433) Can Manage Its Debt Responsibly

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.' 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. Importantly, Zhongtian Construction (Hunan) Group Limited (HKG:2433) does carry debt. But the more important question is: how much risk is that debt creating?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhongtian Construction (Hunan) Group

What Is Zhongtian Construction (Hunan) Group's Net Debt?

The image below, which you can click on for greater detail, shows that Zhongtian Construction (Hunan) Group had debt of CN¥115.4m at the end of June 2024, a reduction from CN¥150.6m over a year. However, it does have CN¥218.6m in cash offsetting this, leading to net cash of CN¥103.1m.

A Look At Zhongtian Construction (Hunan) Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhongtian Construction (Hunan) Group had liabilities of CN¥1.73b due within 12 months and liabilities of CN¥8.48m due beyond that. On the other hand, it had cash of CN¥218.6m and CN¥1.87b worth of receivables due within a year. So it can boast CN¥352.3m more liquid assets than total liabilities.

This surplus strongly suggests that Zhongtian Construction (Hunan) Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Zhongtian Construction (Hunan) Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Zhongtian Construction (Hunan) Group's EBIT was down 89% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhongtian Construction (Hunan) Group will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhongtian Construction (Hunan) Group 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, Zhongtian Construction (Hunan) Group created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhongtian Construction (Hunan) Group has CN¥103.1m in net cash and a strong balance sheet. So we don't have any problem with Zhongtian Construction (Hunan) Group's use of debt. 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 4 warning signs for Zhongtian Construction (Hunan) Group (of which 1 is a bit unpleasant!) 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.