Streamax Technology (SZSE:002970) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Streamax Technology Co., Ltd. (SZSE:002970) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Streamax Technology

What Is Streamax Technology's Debt?

As you can see below, at the end of March 2024, Streamax Technology had CN¥319.1m of debt, up from CN¥224.7m a year ago. Click the image for more detail. However, it does have CN¥855.9m in cash offsetting this, leading to net cash of CN¥536.8m.

A Look At Streamax Technology's Liabilities

We can see from the most recent balance sheet that Streamax Technology had liabilities of CN¥978.6m falling due within a year, and liabilities of CN¥138.7m due beyond that. Offsetting this, it had CN¥855.9m in cash and CN¥484.9m in receivables that were due within 12 months. So it actually has CN¥223.5m more liquid assets than total liabilities.

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

Although Streamax Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥104m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Streamax Technology 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Streamax Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Streamax Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Streamax Technology has net cash of CN¥536.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥255m, being 246% of its EBIT. So we don't think Streamax Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Streamax Technology , and understanding them should be part of your investment process.

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.