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 Zhuzhou Times New Material Technology Co., Ltd. (SHSE:600458) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Zhuzhou Times New Material Technology's Debt?

The chart below, which you can click on for greater detail, shows that Zhuzhou Times New Material Technology had CN¥1.91b in debt in June 2024; about the same as the year before. However, it does have CN¥2.14b in cash offsetting this, leading to net cash of CN¥229.9m.

How Strong Is Zhuzhou Times New Material Technology's Balance Sheet?

The latest balance sheet data shows that Zhuzhou Times New Material Technology had liabilities of CN¥10.9b due within a year, and liabilities of CN¥2.07b falling due after that. On the other hand, it had cash of CN¥2.14b and CN¥8.55b worth of receivables due within a year. So its liabilities total CN¥2.32b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Zhuzhou Times New Material Technology has a market capitalization of CN¥7.20b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Zhuzhou Times New Material Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Zhuzhou Times New Material Technology grew its EBIT by 106% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Zhuzhou Times New Material Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zhuzhou Times New Material Technology 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. During the last three years, Zhuzhou Times New Material Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Zhuzhou Times New Material Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥229.9m. And it impressed us with its EBIT growth of 106% over the last year. So we don't have any problem with Zhuzhou Times New Material Technology's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhuzhou Times New Material Technology you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.