David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Zhejiang Supor Co., Ltd. (SZSE:002032) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Zhejiang Supor's Net Debt?

As you can see below, at the end of March 2024, Zhejiang Supor had CN¥209.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.24b in cash, so it actually has CN¥5.03b net cash.

How Healthy Is Zhejiang Supor's Balance Sheet?

According to the last reported balance sheet, Zhejiang Supor had liabilities of CN¥5.91b due within 12 months, and liabilities of CN¥189.9m due beyond 12 months. Offsetting this, it had CN¥5.24b in cash and CN¥2.72b in receivables that were due within 12 months. So it can boast CN¥1.86b more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Supor could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Supor boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Zhejiang Supor grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhejiang Supor'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang Supor 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. Happily for any shareholders, Zhejiang Supor actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Supor has net cash of CN¥5.03b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.2b, being 107% of its EBIT. So is Zhejiang Supor's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Zhejiang Supor , and understanding them should be part of your investment process.

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.

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