Zhuzhou CRRC Times Electric (HKG:3898) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 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 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhuzhou CRRC Times Electric

What Is Zhuzhou CRRC Times Electric's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhuzhou CRRC Times Electric had CN¥1.34b of debt, an increase on CN¥580.7m, over one year. But it also has CN¥14.1b in cash to offset that, meaning it has CN¥12.8b net cash.

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

Zooming in on the latest balance sheet data, we can see that Zhuzhou CRRC Times Electric had liabilities of CN¥14.4b due within 12 months and liabilities of CN¥2.44b due beyond that. Offsetting this, it had CN¥14.1b in cash and CN¥18.3b in receivables that were due within 12 months. So it actually has CN¥15.5b more liquid assets than total liabilities.

This excess liquidity suggests that Zhuzhou CRRC Times Electric is taking a careful approach to debt. 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!

Another good sign is that Zhuzhou CRRC Times Electric has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Zhuzhou CRRC Times Electric's free cash flow amounted to 42% of its EBIT, less 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¥12.8b, as well as more liquid assets than liabilities. And we liked the look of last year's 24% year-on-year EBIT growth. So we don't think Zhuzhou CRRC Times Electric's use of debt is risky. 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.