Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Zhejiang Unifull Industrial Fibre Co., Ltd. (SZSE:002427) does carry debt. But the real question is whether this debt is making the company risky.
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Zhejiang Unifull Industrial Fibre
How Much Debt Does Zhejiang Unifull Industrial Fibre Carry?
You can click the graphic below for the historical numbers, but it shows that Zhejiang Unifull Industrial Fibre had CN¥716.7m of debt in September 2023, down from CN¥3.28b, one year before. On the flip side, it has CN¥299.5m in cash leading to net debt of about CN¥417.1m.
How Strong Is Zhejiang Unifull Industrial Fibre's Balance Sheet?
According to the last reported balance sheet, Zhejiang Unifull Industrial Fibre had liabilities of CN¥1.01b due within 12 months, and liabilities of CN¥635.3m due beyond 12 months. On the other hand, it had cash of CN¥299.5m and CN¥882.5m worth of receivables due within a year. So its liabilities total CN¥466.3m more than the combination of its cash and short-term receivables.
Since publicly traded Zhejiang Unifull Industrial Fibre shares are worth a total of CN¥4.50b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang Unifull Industrial Fibre's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Zhejiang Unifull Industrial Fibre's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months Zhejiang Unifull Industrial Fibre produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥166m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥87m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhejiang Unifull Industrial Fibre you should know about.
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.