The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Zhejiang Sunflower Great Health Limited Liability Company (SZSE:300111) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Zhejiang Sunflower Great Health Limited Liability
How Much Debt Does Zhejiang Sunflower Great Health Limited Liability Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2023 Zhejiang Sunflower Great Health Limited Liability had CN¥77.7m of debt, an increase on none, over one year. However, it does have CN¥597.3m in cash offsetting this, leading to net cash of CN¥519.6m.
A Look At Zhejiang Sunflower Great Health Limited Liability's Liabilities
Zooming in on the latest balance sheet data, we can see that Zhejiang Sunflower Great Health Limited Liability had liabilities of CN¥174.4m due within 12 months and liabilities of CN¥39.0m due beyond that. Offsetting this, it had CN¥597.3m in cash and CN¥86.9m in receivables that were due within 12 months. So it actually has CN¥470.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Zhejiang Sunflower Great Health Limited Liability could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Sunflower Great Health Limited Liability boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang Sunflower Great Health Limited Liability's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Zhejiang Sunflower Great Health Limited Liability wasn't profitable at an EBIT level, but managed to grow its revenue by 9.3%, to CN¥336m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Zhejiang Sunflower Great Health Limited Liability?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Zhejiang Sunflower Great Health Limited Liability lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥106m of cash and made a loss of CN¥6.5m. Given it only has net cash of CN¥519.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 1 warning sign for Zhejiang Sunflower Great Health Limited Liability 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.