Warren Buffett famously said, '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. Importantly, Zenner Metering Technology (Shanghai) Ltd. (SZSE:301303) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Zenner Metering Technology (Shanghai) Carry?

As you can see below, at the end of March 2024, Zenner Metering Technology (Shanghai) had CN¥167.0m of debt, up from CN¥103.8m a year ago. Click the image for more detail. But it also has CN¥535.1m in cash to offset that, meaning it has CN¥368.1m net cash.

A Look At Zenner Metering Technology (Shanghai)'s Liabilities

We can see from the most recent balance sheet that Zenner Metering Technology (Shanghai) had liabilities of CN¥488.1m falling due within a year, and liabilities of CN¥105.0m due beyond that. On the other hand, it had cash of CN¥535.1m and CN¥1.04b worth of receivables due within a year. So it can boast CN¥977.5m more liquid assets than total liabilities.

This surplus suggests that Zenner Metering Technology (Shanghai) is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Zenner Metering Technology (Shanghai) has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Zenner Metering Technology (Shanghai) grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zenner Metering Technology (Shanghai) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zenner Metering Technology (Shanghai) 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, Zenner Metering Technology (Shanghai) saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zenner Metering Technology (Shanghai) has net cash of CN¥368.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 65% over the last year. So we don't think Zenner Metering Technology (Shanghai)'s use of debt is risky. 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 Zenner Metering Technology (Shanghai) is showing 1 warning sign in our investment analysis , you should know about...

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.