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. As with many other companies Zhejiang Weixing Industrial Development Co., Ltd. (SZSE:002003) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Zhejiang Weixing Industrial Development's Debt?

As you can see below, Zhejiang Weixing Industrial Development had CN¥837.9m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥1.51b in cash, so it actually has CN¥668.7m net cash.

A Look At Zhejiang Weixing Industrial Development's Liabilities

We can see from the most recent balance sheet that Zhejiang Weixing Industrial Development had liabilities of CN¥1.56b falling due within a year, and liabilities of CN¥228.5m due beyond that. Offsetting this, it had CN¥1.51b in cash and CN¥587.2m in receivables that were due within 12 months. So it actually has CN¥302.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Weixing Industrial Development could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhejiang Weixing Industrial Development has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Zhejiang Weixing Industrial Development has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. 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 Weixing Industrial Development'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Weixing Industrial Development 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 Weixing Industrial Development reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Weixing Industrial Development has net cash of CN¥668.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 23% year-on-year EBIT growth. So we don't think Zhejiang Weixing Industrial Development's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Zhejiang Weixing Industrial Development , and understanding them should be part of your investment process.

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.

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