Is Zhuzhou CRRC Times Electric (HKG:3898) A Risky Investment?

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.' 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 can see that Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zhuzhou CRRC Times Electric

What Is Zhuzhou CRRC Times Electric's Net Debt?

The image below, which you can click on for greater detail, shows that Zhuzhou CRRC Times Electric had debt of CN¥517.3m at the end of September 2024, a reduction from CN¥1.08b over a year. But on the other hand it also has CN¥11.9b in cash, leading to a CN¥11.3b net cash position.

A Look At Zhuzhou CRRC Times Electric's Liabilities

The latest balance sheet data shows that Zhuzhou CRRC Times Electric had liabilities of CN¥17.9b due within a year, and liabilities of CN¥1.73b falling due after that. On the other hand, it had cash of CN¥11.9b and CN¥21.4b worth of receivables due within a year. So it can boast CN¥13.6b more liquid assets than total liabilities.

This surplus suggests that Zhuzhou CRRC Times Electric is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Zhuzhou CRRC Times Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Zhuzhou CRRC Times Electric grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhuzhou CRRC Times Electric's ability to maintain a healthy balance sheet going forward. 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 Zhuzhou CRRC Times Electric 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. Looking at the most recent three years, Zhuzhou CRRC Times Electric recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhuzhou CRRC Times Electric has net cash of CN¥11.3b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 25% over the last year. So is Zhuzhou CRRC Times Electric's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Zhuzhou CRRC Times Electric's dividend history, without delay!

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.