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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

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 September 2023 Zhuzhou CRRC Times Electric had CN¥1.29b of debt, an increase on CN¥551.1m, over one year. However, it does have CN¥11.1b in cash offsetting this, leading to net cash of CN¥9.80b.

How Healthy 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. Offsetting these obligations, it had cash of CN¥11.1b as well as receivables valued at CN¥17.2b due within 12 months. So it actually has 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. Because it has plenty of assets, it is unlikely to have trouble 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 29% 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 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 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhuzhou CRRC Times Electric has CN¥9.80b in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't think Zhuzhou CRRC Times Electric's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhuzhou CRRC Times Electric's earnings per share history for free.

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.