Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Zhejiang Weixing Industrial Development Co., Ltd. (SZSE:002003) does use debt in its business. But the more important question is: how much risk is that debt creating?

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

What Is Zhejiang Weixing Industrial Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang Weixing Industrial Development had CN¥1.30b of debt, an increase on CN¥1.13b, over one year. However, its balance sheet shows it holds CN¥1.48b in cash, so it actually has CN¥184.8m net cash.

How Healthy Is Zhejiang Weixing Industrial Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Weixing Industrial Development had liabilities of CN¥2.05b due within 12 months and liabilities of CN¥225.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.48b as well as receivables valued at CN¥806.5m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Zhejiang Weixing Industrial Development'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¥15.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Zhejiang Weixing Industrial Development boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Zhejiang Weixing Industrial Development grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. 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 Weixing Industrial Development 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Weixing Industrial Development 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. Looking at the most recent three years, Zhejiang Weixing Industrial Development recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Weixing Industrial Development has CN¥184.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 39% year-on-year EBIT growth. So is Zhejiang Weixing Industrial Development's debt a risk? It doesn't seem so to us. 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 Zhejiang Weixing Industrial Development that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.