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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Zhejiang Century Huatong Group Co.,Ltd (SZSE:002602) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Zhejiang Century Huatong GroupLtd Carry?

As you can see below, Zhejiang Century Huatong GroupLtd had CN¥1.03b of debt at March 2024, down from CN¥3.65b a year prior. However, its balance sheet shows it holds CN¥3.74b in cash, so it actually has CN¥2.71b net cash.

How Strong Is Zhejiang Century Huatong GroupLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang Century Huatong GroupLtd had liabilities of CN¥8.68b due within 12 months, and liabilities of CN¥2.78b due beyond 12 months. Offsetting this, it had CN¥3.74b in cash and CN¥3.80b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.93b more than its cash and near-term receivables, combined.

Of course, Zhejiang Century Huatong GroupLtd has a market capitalization of CN¥23.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Zhejiang Century Huatong GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Zhejiang Century Huatong GroupLtd grew its EBIT by 150% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhejiang Century Huatong GroupLtd'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 Zhejiang Century Huatong GroupLtd 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. Over the last three years, Zhejiang Century Huatong GroupLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Zhejiang Century Huatong GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥2.71b. And it impressed us with free cash flow of CN¥2.6b, being 126% of its EBIT. So we don't think Zhejiang Century Huatong GroupLtd'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 Zhejiang Century Huatong GroupLtd's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.