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 note that Zhejiang Century Huatong Group Co.,Ltd (SZSE:002602) does have debt on its balance sheet. 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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Zhejiang Century Huatong GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Zhejiang Century Huatong GroupLtd had debt of CN¥4.25b, up from CN¥3.49b in one year. But it also has CN¥5.29b in cash to offset that, meaning it has CN¥1.04b net cash.

How Healthy Is Zhejiang Century Huatong GroupLtd's Balance Sheet?

The latest balance sheet data shows that Zhejiang Century Huatong GroupLtd had liabilities of CN¥10.5b due within a year, and liabilities of CN¥1.81b falling due after that. Offsetting these obligations, it had cash of CN¥5.29b as well as receivables valued at CN¥4.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.77b.

Of course, Zhejiang Century Huatong GroupLtd has a market capitalization of CN¥34.4b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Zhejiang Century Huatong GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Zhejiang Century Huatong GroupLtd has boosted its EBIT by 87%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhejiang Century Huatong GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Century Huatong GroupLtd 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. Over the last three years, Zhejiang Century Huatong GroupLtd 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 look at a company's total liabilities, it is very reassuring that Zhejiang Century Huatong GroupLtd has CN¥1.04b in net cash. And it impressed us with free cash flow of CN¥2.9b, being 135% of its EBIT. So is Zhejiang Century Huatong GroupLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zhejiang Century Huatong GroupLtd is showing 1 warning sign in our investment analysis , you should know about...

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.