Warren Buffett famously said, '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, Zhejiang Supor Co., Ltd. (SZSE:002032) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Zhejiang Supor Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang Supor had CN¥200.0m of debt, an increase on CN¥3.91m, over one year. However, its balance sheet shows it holds CN¥3.23b in cash, so it actually has CN¥3.03b net cash.

How Strong Is Zhejiang Supor's Balance Sheet?

According to the last reported balance sheet, Zhejiang Supor had liabilities of CN¥6.11b due within 12 months, and liabilities of CN¥227.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.23b as well as receivables valued at CN¥3.68b due within 12 months. So it can boast CN¥574.0m more liquid assets than total liabilities.

Having regard to Zhejiang Supor's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥41.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Zhejiang Supor has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Zhejiang Supor grew its EBIT by 16% last year, making its debt load easier to handle. 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 Zhejiang Supor can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Supor 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. Happily for any shareholders, Zhejiang Supor actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Supor has CN¥3.03b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.9b, being 105% of its EBIT. So is Zhejiang Supor's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Zhejiang Supor , and understanding them should be part of your investment process.

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.