These 4 Measures Indicate That Shenzhen INVT ElectricLtd (SZSE:002334) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shenzhen INVT Electric Co.,Ltd (SZSE:002334) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Shenzhen INVT ElectricLtd

How Much Debt Does Shenzhen INVT ElectricLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen INVT ElectricLtd had CN¥454.1m of debt, an increase on CN¥435.2m, over one year. But on the other hand it also has CN¥1.09b in cash, leading to a CN¥640.8m net cash position.

How Healthy Is Shenzhen INVT ElectricLtd's Balance Sheet?

The latest balance sheet data shows that Shenzhen INVT ElectricLtd had liabilities of CN¥1.80b due within a year, and liabilities of CN¥524.3m falling due after that. Offsetting these obligations, it had cash of CN¥1.09b as well as receivables valued at CN¥1.56b due within 12 months. So it actually has CN¥324.8m more liquid assets than total liabilities.

This surplus suggests that Shenzhen INVT ElectricLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

The modesty of its debt load may become crucial for Shenzhen INVT ElectricLtd if management cannot prevent a repeat of the 45% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 INVT ElectricLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen INVT ElectricLtd 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 INVT ElectricLtd produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen INVT ElectricLtd has CN¥640.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥248m, being 71% of its EBIT. So we are not troubled with Shenzhen INVT ElectricLtd's debt use. 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. For instance, we've identified 2 warning signs for Shenzhen INVT ElectricLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.