Warren Buffett famously said, '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. As with many other companies Zhejiang Huatong Meat Products Co., Ltd. (SZSE:002840) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Zhejiang Huatong Meat Products Carry?
The image below, which you can click on for greater detail, shows that at September 2023 Zhejiang Huatong Meat Products had debt of CN¥4.79b, up from CN¥4.15b in one year. On the flip side, it has CN¥684.9m in cash leading to net debt of about CN¥4.10b.
A Look At Zhejiang Huatong Meat Products' Liabilities
Zooming in on the latest balance sheet data, we can see that Zhejiang Huatong Meat Products had liabilities of CN¥3.08b due within 12 months and liabilities of CN¥3.39b due beyond that. Offsetting this, it had CN¥684.9m in cash and CN¥106.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥5.68b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Zhejiang Huatong Meat Products has a market capitalization of CN¥11.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Huatong Meat Products 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.
Over 12 months, Zhejiang Huatong Meat Products reported revenue of CN¥9.2b, which is a gain of 8.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Zhejiang Huatong Meat Products produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥167m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥643m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Zhejiang Huatong Meat Products , and understanding them should be part of your investment process.
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.