Zhou Hei Ya International Holdings (HKG:1458) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Zhou Hei Ya International Holdings Company Limited (HKG:1458) does use debt in its business. But should shareholders be worried about its use of debt?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is Zhou Hei Ya International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Zhou Hei Ya International Holdings had CN¥150.0m of debt, an increase on none, over one year. But it also has CN¥1.47b in cash to offset that, meaning it has CN¥1.32b net cash.

A Look At Zhou Hei Ya International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Zhou Hei Ya International Holdings had liabilities of CN¥765.8m due within 12 months and liabilities of CN¥195.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.47b as well as receivables valued at CN¥67.9m due within 12 months. So it can boast CN¥574.6m 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. Succinctly put, Zhou Hei Ya International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Zhou Hei Ya International Holdings

The good news is that Zhou Hei Ya International Holdings has increased its EBIT by 3.6% over twelve months, which should ease any concerns about debt repayment. 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 Zhou Hei Ya International Holdings 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. Zhou Hei Ya International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Zhou Hei Ya International Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhou Hei Ya International Holdings has net cash of CN¥1.32b, as well as more liquid assets than liabilities. The cherry on top was that in converted 281% of that EBIT to free cash flow, bringing in CN¥353m. So we don't think Zhou Hei Ya International Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Zhou Hei Ya International Holdings that you should be aware of before investing here.

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.