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Does Zhejiang Dun’an’s Artificial Environment (SZSE:002011) have a healthy balance?

Some say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said, “Volatility is far from synonymous with risk.” So it’s obvious that you need to consider debt, when you think about how risky certain stocks are, because too much debt can sink a company. We note that Zhejiang Dun’an Artificial Environment Co., Ltd (SZSE:002011) has debts on its balance sheet. But is this debt a concern for shareholders?

When is debt dangerous?

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. An essential part of capitalism is the process of ‘creative destruction’, whereby bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still expensive) situation is where a company must dilute its shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in companies, especially in wealthy companies. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Dun’an Artificial Environment

What is the net debt of Zhejiang Dun’an artificial environment?

The image below, which you can click on for more details, shows that Zhejiang Dun’an Artificial Environment had debt of CN¥1.66 billion as of March 2024, up from CN¥1.37 billion in one year time. But it also has CN¥2.72 billion in offsetting cash, meaning it has net CN¥1.05 billion in cash.

SZSE:002011 Equity Debt History June 6, 2024

A look at the liabilities of Zhejiang Dun’an’s artificial environment

From the most recent balance sheet, we can see that Zhejiang Dun’an Artificial Environment had liabilities of CN¥5.31b due within a year, and liabilities of CN¥878.7m due beyond that. Offsetting these liabilities, it had cash valued at CN¥2.72b as well as receivables valued at CN¥4.21b due within 12 months. So it can boast CN¥736.8 million more liquid assets than total debts.

This short-term liquidity is a sign that Zhejiang Dun’an Artificial Environment could likely pay off its debt easily, as its balance sheet is far from stretched. To put it bluntly, Zhejiang Dun’an Artificial Environment has net cash, so it’s fair to say it doesn’t have a heavy debt load!

Another good sign is that Zhejiang Dun’an Artificial Environment was able to grow its EBIT by 26% in twelve months, making it easier to pay down debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Zhejiang Dun’an Artificial Environment 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 interesting.

But our final consideration is also important, because a company cannot pay its debts with paper profits; it needs cold, hard money. Zhejiang Dun’an Artificial Environment may have net cash on the balance sheet, but it’s still interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as that reflects both its needs and its assets to manage debts. Over the last three years, Zhejiang Dun’an Artificial Environment posted free cash flow worth 79% of EBIT, which is about normal considering free cash flow excludes interest and taxes. This cold, hard money means the country can reduce its debt whenever it wants.

Sum up

While we empathize with investors who find debt worrisome, keep in mind that Zhejiang Dun’an Artificial Environment has net cash worth CN¥1.05b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥581 million, or 79% of EBIT. Then is Zhejiang Dun’an Artificial Environment’s debt a risk? It doesn’t seem that way to us. Over time, stock prices tend to follow earnings per share, so if you’re interested in Zhejiang Dun’an Artificial Environment, you might want to click here to see an interactive graph of its earnings per share history .

If you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks.

Valuation is complex, but we help make it simple.

Find out whether Zhejiang Dun’an’s artificial environment is potentially over- or undervalued by checking out our comprehensive analysis, including: fair value estimates, risks and cautions, dividends, insider transactions and financial health.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.