Zhuzhou CRRC Times Electric (HKG:3898) Seems To Use Debt Rather Sparingly

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.' 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. As with many other companies Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Zhuzhou CRRC Times Electric

How Much Debt Does Zhuzhou CRRC Times Electric Carry?

As you can see below, at the end of September 2023, Zhuzhou CRRC Times Electric had CN¥1.08b of debt, up from CN¥410.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥11.1b in cash, leading to a CN¥10.0b net cash position.

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

We can see from the most recent balance sheet that Zhuzhou CRRC Times Electric had liabilities of CN¥12.9b falling due within a year, and liabilities of CN¥2.10b due beyond that. On the other hand, it had cash of CN¥11.1b and CN¥17.2b worth of receivables due within a year. So it can boast CN¥13.4b 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. Due to its strong net asset position, it is not likely to face 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!

In addition to that, we're happy to report that Zhuzhou CRRC Times Electric has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Looking at the most recent three years, Zhuzhou CRRC Times Electric recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhuzhou CRRC Times Electric has CN¥10.0b in net cash and a decent-looking balance sheet. And we liked the look of last year's 37% year-on-year EBIT growth. 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.

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.

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.