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. We note that Zhejiang ZUCH Technology Co., Ltd (SZSE:301280) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Zhejiang ZUCH Technology's Net Debt?

As you can see below, at the end of June 2024, Zhejiang ZUCH Technology had CN¥28.1m of debt, up from CN¥12.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥855.5m in cash, so it actually has CN¥827.4m net cash.

How Healthy Is Zhejiang ZUCH Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang ZUCH Technology had liabilities of CN¥558.2m due within 12 months and liabilities of CN¥19.2m due beyond that. Offsetting this, it had CN¥855.5m in cash and CN¥819.2m in receivables that were due within 12 months. So it actually has CN¥1.10b more liquid assets than total liabilities.

This luscious liquidity implies that Zhejiang ZUCH Technology's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Zhejiang ZUCH Technology 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 ZUCH Technology has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. 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 ZUCH Technology'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. While Zhejiang ZUCH Technology 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. Over the last three years, Zhejiang ZUCH Technology recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang ZUCH Technology has CN¥827.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 48% over the last year. So we don't think Zhejiang ZUCH Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Zhejiang ZUCH Technology (1 is a bit concerning) 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.

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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.