Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zhuzhou Tianqiao Crane Co., Ltd. (SZSE:002523) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 Zhuzhou Tianqiao Crane's Debt?

You can click the graphic below for the historical numbers, but it shows that Zhuzhou Tianqiao Crane had CN¥194.7m of debt in September 2024, down from CN¥360.5m, one year before. But on the other hand it also has CN¥692.1m in cash, leading to a CN¥497.4m net cash position.

How Strong Is Zhuzhou Tianqiao Crane's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhuzhou Tianqiao Crane had liabilities of CN¥2.05b due within 12 months and liabilities of CN¥116.5m due beyond that. On the other hand, it had cash of CN¥692.1m and CN¥1.66b worth of receivables due within a year. So it actually has CN¥187.4m more liquid assets than total liabilities.

This surplus suggests that Zhuzhou Tianqiao Crane has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhuzhou Tianqiao Crane boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Zhuzhou Tianqiao Crane turned things around in the last 12 months, delivering and EBIT of CN¥53m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhuzhou Tianqiao Crane will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zhuzhou Tianqiao Crane 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. Over the last year, Zhuzhou Tianqiao Crane actually produced more free cash flow than EBIT. 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 it is always sensible to investigate a company's debt, in this case Zhuzhou Tianqiao Crane has CN¥497.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 580% of that EBIT to free cash flow, bringing in CN¥308m. So we don't think Zhuzhou Tianqiao Crane's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Zhuzhou Tianqiao Crane that you should be aware of before investing here.

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.