These 4 Measures Indicate That Shenzhen VMAX New Energy (SHSE:688612) Is Using Debt Reasonably Well

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. Importantly, Shenzhen VMAX New Energy Co., Ltd. (SHSE:688612) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen VMAX New Energy

How Much Debt Does Shenzhen VMAX New Energy Carry?

As you can see below, at the end of September 2024, Shenzhen VMAX New Energy had CN¥653.4m of debt, up from CN¥509.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.62b in cash, leading to a CN¥1.96b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Shenzhen VMAX New Energy had liabilities of CN¥3.81b due within 12 months and liabilities of CN¥359.0m due beyond that. Offsetting this, it had CN¥2.62b in cash and CN¥2.21b in receivables that were due within 12 months. So it can boast CN¥655.7m 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. Succinctly put, Shenzhen VMAX New Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shenzhen VMAX New Energy grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen VMAX New Energy'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 company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Shenzhen VMAX New Energy created free cash flow amounting to 9.6% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

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¥1.96b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 59% over the last year. So we don't think Shenzhen VMAX New Energy's use of debt is 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. Case in point: We've spotted 2 warning signs for Shenzhen VMAX New Energy you should be aware of, and 1 of them shouldn't be ignored.

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.