Does Shenzhen KSTAR Science and Technology (SZSE:002518) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 KSTAR Science and Technology Co., Ltd. (SZSE:002518) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenzhen KSTAR Science and Technology

How Much Debt Does Shenzhen KSTAR Science and Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen KSTAR Science and Technology had CN¥165.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥1.00b in cash, so it actually has CN¥838.9m net cash.

How Strong Is Shenzhen KSTAR Science and Technology's Balance Sheet?

The latest balance sheet data shows that Shenzhen KSTAR Science and Technology had liabilities of CN¥2.09b due within a year, and liabilities of CN¥294.4m falling due after that. Offsetting this, it had CN¥1.00b in cash and CN¥1.63b in receivables that were due within 12 months. So it can boast CN¥244.8m more liquid assets than total liabilities.

This state of affairs indicates that Shenzhen KSTAR Science and Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥15.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shenzhen KSTAR Science and Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shenzhen KSTAR Science and Technology's saving grace is its low debt levels, because its EBIT has tanked 57% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 KSTAR Science and 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. While Shenzhen KSTAR Science and Technology 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. Over the most recent three years, Shenzhen KSTAR Science and Technology recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 KSTAR Science and Technology has CN¥838.9m in net cash and a decent-looking balance sheet. So we don't have any problem with Shenzhen KSTAR Science and Technology's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Shenzhen KSTAR Science and Technology (including 1 which is a bit concerning) .

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.