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.' 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. We can see that Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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.

Check out our latest analysis for Zhuzhou CRRC Times Electric

How Much Debt Does Zhuzhou CRRC Times Electric Carry?

You can click the graphic below for the historical numbers, but it shows that Zhuzhou CRRC Times Electric had CN¥709.8m of debt in September 2024, down from CN¥1.12b, one year before. But it also has CN¥11.9b in cash to offset that, meaning it has CN¥11.1b net cash.

How Healthy Is Zhuzhou CRRC Times Electric's Balance Sheet?

According to the last reported balance sheet, Zhuzhou CRRC Times Electric had liabilities of CN¥17.9b due within 12 months, and liabilities of CN¥1.73b due beyond 12 months. On the other hand, it had cash of CN¥11.9b and CN¥21.4b worth of receivables due within a year. So it can boast CN¥13.6b more liquid assets than total liabilities.

It's good to see that Zhuzhou CRRC Times Electric has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Zhuzhou CRRC Times Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Zhuzhou CRRC Times Electric has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhuzhou CRRC Times Electric's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhuzhou CRRC Times Electric 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, Zhuzhou CRRC Times Electric reported free cash flow worth 3.9% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhuzhou CRRC Times Electric has CN¥11.1b in net cash and a decent-looking balance sheet. And we liked the look of last year's 67% year-on-year EBIT growth. So we don't think Zhuzhou CRRC Times Electric's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhuzhou CRRC Times Electric's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.