Is Zhuzhou CRRC Times Electric (HKG:3898) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhuzhou CRRC Times Electric

What Is Zhuzhou CRRC Times Electric's Net Debt?

As you can see below, at the end of March 2023, Zhuzhou CRRC Times Electric had CN¥580.7m of debt, up from CN¥425.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥11.8b in cash, so it actually has CN¥11.3b net cash.

A Look At Zhuzhou CRRC Times Electric's Liabilities

According to the last reported balance sheet, Zhuzhou CRRC Times Electric had liabilities of CN¥11.7b due within 12 months, and liabilities of CN¥1.71b due beyond 12 months. Offsetting this, it had CN¥11.8b in cash and CN¥15.9b in receivables that were due within 12 months. So it can boast CN¥14.4b more liquid assets than total liabilities.

It's good to see that Zhuzhou CRRC Times Electric has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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!

On top of that, Zhuzhou CRRC Times Electric grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Zhuzhou CRRC Times Electric can strengthen its balance sheet over time. 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. Zhuzhou CRRC Times Electric 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, Zhuzhou CRRC Times Electric 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 Zhuzhou CRRC Times Electric has CN¥11.3b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 35% over the last year. So is Zhuzhou CRRC Times Electric's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Zhuzhou CRRC Times Electric, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.