These 4 Measures Indicate That Shenzhen United Winners Laser (SHSE:688518) Is Using Debt Extensively

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. As with many other companies Shenzhen United Winners Laser Co., Ltd. (SHSE:688518) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shenzhen United Winners Laser

How Much Debt Does Shenzhen United Winners Laser Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen United Winners Laser had CN¥655.1m of debt, an increase on CN¥140.3m, over one year. But on the other hand it also has CN¥1.10b in cash, leading to a CN¥446.5m net cash position.

A Look At Shenzhen United Winners Laser's Liabilities

The latest balance sheet data shows that Shenzhen United Winners Laser had liabilities of CN¥3.71b due within a year, and liabilities of CN¥9.16m falling due after that. Offsetting these obligations, it had cash of CN¥1.10b as well as receivables valued at CN¥2.33b due within 12 months. So its liabilities total CN¥288.3m more than the combination of its cash and short-term receivables.

Given Shenzhen United Winners Laser has a market capitalization of CN¥6.12b, 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.

It is just as well that Shenzhen United Winners Laser's load is not too heavy, because its EBIT was down 72% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen United Winners Laser'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shenzhen United Winners Laser has CN¥446.5m in net cash. So although we see some areas for improvement, we're not too worried about Shenzhen United Winners Laser's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Shenzhen United Winners Laser (of which 1 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.