Does Shenzhen VMAX New Energy (SHSE:688612) Have A Healthy Balance Sheet?

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. Importantly, Shenzhen VMAX New Energy Co., Ltd. (SHSE:688612) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenzhen VMAX New Energy

What Is Shenzhen VMAX New Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen VMAX New Energy had CN¥569.5m of debt in March 2024, down from CN¥607.2m, one year before. But it also has CN¥2.56b in cash to offset that, meaning it has CN¥1.99b net cash.

How Healthy Is Shenzhen VMAX New Energy's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen VMAX New Energy had liabilities of CN¥3.35b falling due within a year, and liabilities of CN¥363.9m due beyond that. Offsetting these obligations, it had cash of CN¥2.56b as well as receivables valued at CN¥1.98b due within 12 months. So it actually has CN¥825.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen VMAX New Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shenzhen VMAX New Energy has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shenzhen VMAX New Energy grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen VMAX New Energy 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen VMAX New Energy 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. During the last three years, Shenzhen VMAX New Energy burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen VMAX New Energy has net cash of CN¥1.99b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 61% over the last year. So we are not troubled with Shenzhen VMAX New Energy's debt use. 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. For example Shenzhen VMAX New Energy has 2 warning signs (and 1 which is a bit unpleasant) we think 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.