Shenzhen United Winners Laser (SHSE:688518) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Shenzhen United Winners Laser Co., Ltd. (SHSE:688518) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shenzhen United Winners Laser

What Is Shenzhen United Winners Laser's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen United Winners Laser had CN¥143.9m of debt in September 2023, down from CN¥229.5m, one year before. However, it does have CN¥1.15b in cash offsetting this, leading to net cash of CN¥1.01b.

How Healthy Is Shenzhen United Winners Laser's Balance Sheet?

According to the last reported balance sheet, Shenzhen United Winners Laser had liabilities of CN¥3.97b due within 12 months, and liabilities of CN¥14.6m due beyond 12 months. Offsetting this, it had CN¥1.15b in cash and CN¥2.05b in receivables that were due within 12 months. So it has liabilities totalling CN¥783.2m more than its cash and near-term receivables, combined.

Given Shenzhen United Winners Laser has a market capitalization of CN¥4.63b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shenzhen United Winners Laser also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Shenzhen United Winners Laser has been able to increase its EBIT by 20% 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 United Winners Laser 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 company can only pay off debt with cold hard cash, not accounting profits. Shenzhen United Winners Laser 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. During the last three years, Shenzhen United Winners Laser burned a lot of cash. 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

Although Shenzhen United Winners Laser's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.01b. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't have any problem with Shenzhen United Winners Laser's use of debt. 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. For instance, we've identified 1 warning sign for Shenzhen United Winners Laser that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.