We Think Shentong Technology Group (SHSE:605228) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shentong Technology Group Co., Ltd (SHSE:605228) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shentong Technology Group

What Is Shentong Technology Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Shentong Technology Group had debt of CN¥733.1m, up from CN¥59.0m in one year. But on the other hand it also has CN¥1.02b in cash, leading to a CN¥282.7m net cash position.

How Healthy Is Shentong Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shentong Technology Group had liabilities of CN¥853.7m due within 12 months and liabilities of CN¥583.4m due beyond that. Offsetting this, it had CN¥1.02b in cash and CN¥619.5m in receivables that were due within 12 months. So it actually has CN¥198.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Shentong Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shentong Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Shentong Technology Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥105m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shentong Technology Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shentong Technology Group 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 year, Shentong Technology Group recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shentong Technology Group has CN¥282.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥92m, being 88% of its EBIT. So is Shentong Technology Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shentong Technology Group (of which 1 shouldn't be ignored!) you should know about.

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.