These 4 Measures Indicate That Shenzhen Kedali Industry (SZSE:002850) Is Using Debt Reasonably Well

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. As with many other companies Shenzhen Kedali Industry Co., Ltd. (SZSE:002850) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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. 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 Shenzhen Kedali Industry

What Is Shenzhen Kedali Industry's Net Debt?

As you can see below, Shenzhen Kedali Industry had CN¥1.89b of debt at March 2024, down from CN¥3.20b a year prior. However, its balance sheet shows it holds CN¥2.04b in cash, so it actually has CN¥147.0m net cash.

How Strong Is Shenzhen Kedali Industry's Balance Sheet?

The latest balance sheet data shows that Shenzhen Kedali Industry had liabilities of CN¥4.45b due within a year, and liabilities of CN¥1.84b falling due after that. Offsetting this, it had CN¥2.04b in cash and CN¥6.03b in receivables that were due within 12 months. So it can boast CN¥1.79b more liquid assets than total liabilities.

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

Another good sign is that Shenzhen Kedali Industry has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shenzhen Kedali Industry can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen Kedali Industry 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, Shenzhen Kedali Industry saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Kedali Industry has net cash of CN¥147.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 22% over the last year. So we are not troubled with Shenzhen Kedali Industry's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shenzhen Kedali Industry is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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.

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.

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