We Think Zhuzhou CRRC Times Electric (HKG:3898) Can Stay On Top Of Its Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhuzhou CRRC Times Electric

How Much Debt Does Zhuzhou CRRC Times Electric Carry?

As you can see below, Zhuzhou CRRC Times Electric had CN¥480.9m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥15.8b in cash offsetting this, leading to net cash of CN¥15.4b.

How Strong Is Zhuzhou CRRC Times Electric's Balance Sheet?

According to the last reported balance sheet, Zhuzhou CRRC Times Electric had liabilities of CN¥9.15b due within 12 months, and liabilities of CN¥1.71b due beyond 12 months. Offsetting these obligations, it had cash of CN¥15.8b as well as receivables valued at CN¥13.5b due within 12 months. So it can boast CN¥18.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that Zhuzhou CRRC Times Electric's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Zhuzhou CRRC Times Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Zhuzhou CRRC Times Electric's load is not too heavy, because its EBIT was down 37% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 35% 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¥15.4b, as well as more liquid assets than liabilities. So we are not troubled with Zhuzhou CRRC Times Electric's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Zhuzhou CRRC Times Electric that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.