Does Zhen Ding Technology Holding (TWSE:4958) Have A Healthy Balance Sheet?

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 Zhen Ding Technology Holding Limited (TWSE:4958) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhen Ding Technology Holding

What Is Zhen Ding Technology Holding's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Zhen Ding Technology Holding had debt of NT$56.3b, up from NT$51.6b in one year. But it also has NT$64.7b in cash to offset that, meaning it has NT$8.45b net cash.

A Look At Zhen Ding Technology Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhen Ding Technology Holding had liabilities of NT$72.0b due within 12 months and liabilities of NT$43.6b due beyond that. Offsetting this, it had NT$64.7b in cash and NT$37.5b in receivables that were due within 12 months. So it has liabilities totalling NT$13.4b more than its cash and near-term receivables, combined.

Since publicly traded Zhen Ding Technology Holding shares are worth a total of NT$114.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Zhen Ding Technology Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Zhen Ding Technology Holding has increased its EBIT by 5.9% over twelve months, which should ease any concerns about debt repayment. 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 Zhen Ding Technology Holding'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 company can only pay off debt with cold hard cash, not accounting profits. Zhen Ding Technology Holding 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. Looking at the most recent three years, Zhen Ding Technology Holding recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Zhen Ding Technology Holding does have more liabilities than liquid assets, it also has net cash of NT$8.45b. And it also grew its EBIT by 5.9% over the last year. So we don't have any problem with Zhen Ding Technology Holding's use of debt. 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. Be aware that Zhen Ding Technology Holding is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.