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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zbom Home Collection Co.,Ltd (SHSE:603801) does carry debt. But should shareholders be worried about its use of debt?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Zbom Home CollectionLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Zbom Home CollectionLtd had debt of CN¥499.2m, up from CN¥253.9m in one year. However, it does have CN¥1.24b in cash offsetting this, leading to net cash of CN¥736.5m.

A Look At Zbom Home CollectionLtd's Liabilities

We can see from the most recent balance sheet that Zbom Home CollectionLtd had liabilities of CN¥2.71b falling due within a year, and liabilities of CN¥314.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.24b as well as receivables valued at CN¥1.48b due within 12 months. So it has liabilities totalling CN¥312.8m more than its cash and near-term receivables, combined.

Since publicly traded Zbom Home CollectionLtd shares are worth a total of CN¥5.94b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Zbom Home CollectionLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Zbom Home CollectionLtd's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zbom Home CollectionLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zbom Home CollectionLtd 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. In the last three years, Zbom Home CollectionLtd's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Zbom Home CollectionLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥736.5m. So we don't have any problem with Zbom Home CollectionLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zbom Home CollectionLtd (of which 1 is concerning!) you should know about.

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.