Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Zhejiang Changsheng Sliding Bearings Co., Ltd. (SZSE:300718) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Zhejiang Changsheng Sliding Bearings
How Much Debt Does Zhejiang Changsheng Sliding Bearings Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Zhejiang Changsheng Sliding Bearings had CN¥77.6m of debt, an increase on CN¥66.3m, over one year. But on the other hand it also has CN¥638.9m in cash, leading to a CN¥561.3m net cash position.
A Look At Zhejiang Changsheng Sliding Bearings' Liabilities
The latest balance sheet data shows that Zhejiang Changsheng Sliding Bearings had liabilities of CN¥193.3m due within a year, and liabilities of CN¥47.4m falling due after that. On the other hand, it had cash of CN¥638.9m and CN¥333.6m worth of receivables due within a year. So it actually has CN¥731.9m more liquid assets than total liabilities.
This surplus suggests that Zhejiang Changsheng Sliding Bearings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Changsheng Sliding Bearings boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Zhejiang Changsheng Sliding Bearings has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. 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 Changsheng Sliding Bearings'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. While Zhejiang Changsheng Sliding Bearings 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. Looking at the most recent three years, Zhejiang Changsheng Sliding Bearings recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Changsheng Sliding Bearings has net cash of CN¥561.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 56% over the last year. So is Zhejiang Changsheng Sliding Bearings's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Zhejiang Changsheng Sliding Bearings that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.