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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Zhe Jiang Li Zi Yuan Food Co.,Ltd. (SHSE:605337) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Zhe Jiang Li Zi Yuan FoodLtd
What Is Zhe Jiang Li Zi Yuan FoodLtd's Net Debt?
As you can see below, at the end of September 2023, Zhe Jiang Li Zi Yuan FoodLtd had CN¥683.4m of debt, up from CN¥85.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.18b in cash, so it actually has CN¥491.8m net cash.
How Strong Is Zhe Jiang Li Zi Yuan FoodLtd's Balance Sheet?
The latest balance sheet data shows that Zhe Jiang Li Zi Yuan FoodLtd had liabilities of CN¥581.2m due within a year, and liabilities of CN¥644.6m falling due after that. Offsetting this, it had CN¥1.18b in cash and CN¥3.36m in receivables that were due within 12 months. So it has liabilities totalling CN¥47.3m more than its cash and near-term receivables, combined.
Having regard to Zhe Jiang Li Zi Yuan FoodLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.40b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zhe Jiang Li Zi Yuan FoodLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Zhe Jiang Li Zi Yuan FoodLtd saw its EBIT drop by 5.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhe Jiang Li Zi Yuan FoodLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zhe Jiang Li Zi Yuan FoodLtd 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, Zhe Jiang Li Zi Yuan FoodLtd recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
We could understand if investors are concerned about Zhe Jiang Li Zi Yuan FoodLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥491.8m. So we don't have any problem with Zhe Jiang Li Zi Yuan FoodLtd's use of debt. 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. Case in point: We've spotted 2 warning signs for Zhe Jiang Li Zi Yuan FoodLtd you should be aware of.
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.