These 4 Measures Indicate That Shenzhen Desay Battery Technology (SZSE:000049) Is Using Debt Extensively

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. We note that Shenzhen Desay Battery Technology Co., Ltd. (SZSE:000049) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shenzhen Desay Battery Technology

What Is Shenzhen Desay Battery Technology's Net Debt?

As you can see below, at the end of March 2024, Shenzhen Desay Battery Technology had CN¥4.24b of debt, up from CN¥3.55b a year ago. Click the image for more detail. But on the other hand it also has CN¥4.41b in cash, leading to a CN¥175.2m net cash position.

How Strong Is Shenzhen Desay Battery Technology's Balance Sheet?

According to the last reported balance sheet, Shenzhen Desay Battery Technology had liabilities of CN¥6.26b due within 12 months, and liabilities of CN¥3.28b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.41b as well as receivables valued at CN¥3.99b due within 12 months. So its liabilities total CN¥1.13b more than the combination of its cash and short-term receivables.

Since publicly traded Shenzhen Desay Battery Technology shares are worth a total of CN¥8.41b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shenzhen Desay Battery Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shenzhen Desay Battery Technology if management cannot prevent a repeat of the 45% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Desay Battery Technology'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 Desay Battery 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. Over the last three years, Shenzhen Desay Battery Technology reported free cash flow worth 12% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Shenzhen Desay Battery Technology'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¥175.2m. So although we see some areas for improvement, we're not too worried about Shenzhen Desay Battery Technology's balance sheet. 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. Be aware that Shenzhen Desay Battery Technology is showing 2 warning signs in our investment analysis , you should know about...

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.

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