Shenzhen INVT ElectricLtd (SZSE:002334) Could Easily Take On More Debt

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.' 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. Importantly, Shenzhen INVT Electric Co.,Ltd (SZSE:002334) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenzhen INVT ElectricLtd

How Much Debt Does Shenzhen INVT ElectricLtd Carry?

The image below, which you can click on for greater detail, shows that Shenzhen INVT ElectricLtd had debt of CN¥435.2m at the end of September 2023, a reduction from CN¥494.1m over a year. However, it does have CN¥987.9m in cash offsetting this, leading to net cash of CN¥552.7m.

How Strong Is Shenzhen INVT ElectricLtd's Balance Sheet?

The latest balance sheet data shows that Shenzhen INVT ElectricLtd had liabilities of CN¥1.90b due within a year, and liabilities of CN¥572.2m falling due after that. Offsetting this, it had CN¥987.9m in cash and CN¥1.62b in receivables that were due within 12 months. So it actually has CN¥137.9m more liquid assets than total liabilities.

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

On top of that, Shenzhen INVT ElectricLtd grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen INVT ElectricLtd 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. While Shenzhen INVT ElectricLtd 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. In the last three years, Shenzhen INVT ElectricLtd's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen INVT ElectricLtd has CN¥552.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 79% year-on-year EBIT growth. So is Shenzhen INVT ElectricLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Shenzhen INVT ElectricLtd .

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.