Zhen Ding Technology Holding (TWSE:4958) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Zhen Ding Technology Holding Limited (TWSE:4958) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhen Ding Technology Holding

How Much Debt Does Zhen Ding Technology Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhen Ding Technology Holding had NT$54.1b of debt, an increase on NT$50.3b, over one year. But on the other hand it also has NT$73.0b in cash, leading to a NT$18.9b net cash position.

A Look At Zhen Ding Technology Holding's Liabilities

According to the last reported balance sheet, Zhen Ding Technology Holding had liabilities of NT$62.0b due within 12 months, and liabilities of NT$42.6b due beyond 12 months. Offsetting this, it had NT$73.0b in cash and NT$22.6b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$9.03b.

Given Zhen Ding Technology Holding has a market capitalization of NT$131.3b, it's hard to believe these liabilities pose much 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!

It is just as well that Zhen Ding Technology Holding's load is not too heavy, because its EBIT was down 58% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Zhen Ding Technology Holding's free cash flow amounted to 24% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Zhen Ding Technology Holding has NT$18.9b in net cash. So we are not troubled with Zhen Ding Technology Holding's debt use. 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. For example, we've discovered 2 warning signs for Zhen Ding Technology Holding that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com