Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Zhejiang Century Huatong Group Co.,Ltd (SZSE:002602) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Zhejiang Century Huatong GroupLtd's Debt?

As you can see below, Zhejiang Century Huatong GroupLtd had CN¥1.03b of debt at March 2024, down from CN¥3.65b a year prior. However, it does have CN¥3.74b in cash offsetting this, leading to net cash of CN¥2.71b.

How Healthy Is Zhejiang Century Huatong GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Century Huatong GroupLtd had liabilities of CN¥8.68b falling due within a year, and liabilities of CN¥2.78b due beyond that. Offsetting these obligations, it had cash of CN¥3.74b as well as receivables valued at CN¥3.80b due within 12 months. So it has liabilities totalling CN¥3.93b more than its cash and near-term receivables, combined.

Of course, Zhejiang Century Huatong GroupLtd has a market capitalization of CN¥30.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Zhejiang Century Huatong GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Zhejiang Century Huatong GroupLtd grew its EBIT by 150% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhejiang Century Huatong GroupLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhejiang Century Huatong GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Zhejiang Century Huatong GroupLtd 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 Zhejiang Century Huatong GroupLtd does have more liabilities than liquid assets, it also has net cash of CN¥2.71b. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in CN¥2.6b. So is Zhejiang Century Huatong GroupLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhejiang Century Huatong GroupLtd's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.