Does Zhou Hei Ya International Holdings (HKG:1458) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Zhou Hei Ya International Holdings Company Limited (HKG:1458) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Zhou Hei Ya International Holdings

How Much Debt Does Zhou Hei Ya International Holdings Carry?

As you can see below, Zhou Hei Ya International Holdings had CN¥1.28b of debt at December 2021, down from CN¥1.64b a year prior. But it also has CN¥3.22b in cash to offset that, meaning it has CN¥1.94b net cash.

How Healthy Is Zhou Hei Ya International Holdings' Balance Sheet?

According to the last reported balance sheet, Zhou Hei Ya International Holdings had liabilities of CN¥866.9m due within 12 months, and liabilities of CN¥1.56b due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.22b as well as receivables valued at CN¥107.5m due within 12 months. So it can boast CN¥899.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhou Hei Ya International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhou Hei Ya International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Zhou Hei Ya International Holdings grew its EBIT by 304% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhou Hei Ya International Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhou Hei Ya International Holdings 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. Happily for any shareholders, Zhou Hei Ya International Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Zhou Hei Ya International Holdings has CN¥1.94b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in CN¥347m. So is Zhou Hei Ya International Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Zhou Hei Ya International Holdings .

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.