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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Zhang Jia Gang Freetrade Science&Technology Group Co.,Ltd. (SHSE:600794) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Zhang Jia Gang Freetrade Science&Technology GroupLtd's Debt?
As you can see below, Zhang Jia Gang Freetrade Science&Technology GroupLtd had CN¥209.9m of debt at September 2024, down from CN¥271.9m a year prior. But it also has CN¥1.41b in cash to offset that, meaning it has CN¥1.20b net cash.
A Look At Zhang Jia Gang Freetrade Science&Technology GroupLtd's Liabilities
The latest balance sheet data shows that Zhang Jia Gang Freetrade Science&Technology GroupLtd had liabilities of CN¥833.2m due within a year, and liabilities of CN¥200.1m falling due after that. On the other hand, it had cash of CN¥1.41b and CN¥476.0m worth of receivables due within a year. So it actually has CN¥853.5m more liquid assets than total liabilities.
This surplus suggests that Zhang Jia Gang Freetrade Science&Technology GroupLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Zhang Jia Gang Freetrade Science&Technology GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Zhang Jia Gang Freetrade Science&Technology GroupLtd saw its EBIT drop by 5.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhang Jia Gang Freetrade Science&Technology GroupLtd's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhang Jia Gang Freetrade Science&Technology 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. Happily for any shareholders, Zhang Jia Gang Freetrade Science&Technology GroupLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Zhang Jia Gang Freetrade Science&Technology GroupLtd has net cash of CN¥1.20b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.2b, being 226% of its EBIT. So we don't think Zhang Jia Gang Freetrade Science&Technology GroupLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Zhang Jia Gang Freetrade Science&Technology GroupLtd has 1 warning sign we think you should be aware of.
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.
