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.' 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 Viewshine Intelligent Meter Co.,Ltd (SZSE:002849) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Zhejiang Viewshine Intelligent MeterLtd Carry?

The chart below, which you can click on for greater detail, shows that Zhejiang Viewshine Intelligent MeterLtd had CN¥163.9m in debt in September 2024; about the same as the year before. But it also has CN¥546.2m in cash to offset that, meaning it has CN¥382.3m net cash.

How Healthy Is Zhejiang Viewshine Intelligent MeterLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Viewshine Intelligent MeterLtd had liabilities of CN¥884.7m due within 12 months and liabilities of CN¥159.3m due beyond that. Offsetting these obligations, it had cash of CN¥546.2m as well as receivables valued at CN¥993.7m due within 12 months. So it actually has CN¥495.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Viewshine Intelligent MeterLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Viewshine Intelligent MeterLtd 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 Viewshine Intelligent MeterLtd has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang Viewshine Intelligent MeterLtd's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhejiang Viewshine Intelligent MeterLtd 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 most recent three years, Zhejiang Viewshine Intelligent MeterLtd recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Viewshine Intelligent MeterLtd has CN¥382.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 41% over the last year. So is Zhejiang Viewshine Intelligent MeterLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Zhejiang Viewshine Intelligent MeterLtd (1 makes us a bit uncomfortable) you should be aware of.

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.