Is ShenZhen Click TechnologyLTD (SZSE:002782) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that ShenZhen Click Technology Co.,LTD. (SZSE:002782) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ShenZhen Click TechnologyLTD

How Much Debt Does ShenZhen Click TechnologyLTD Carry?

The image below, which you can click on for greater detail, shows that ShenZhen Click TechnologyLTD had debt of CN¥60.8m at the end of September 2024, a reduction from CN¥317.6m over a year. But on the other hand it also has CN¥638.4m in cash, leading to a CN¥577.6m net cash position.

A Look At ShenZhen Click TechnologyLTD's Liabilities

Zooming in on the latest balance sheet data, we can see that ShenZhen Click TechnologyLTD had liabilities of CN¥2.02b due within 12 months and liabilities of CN¥75.9m due beyond that. Offsetting these obligations, it had cash of CN¥638.4m as well as receivables valued at CN¥1.70b due within 12 months. So it actually has CN¥240.3m more liquid assets than total liabilities.

This surplus suggests that ShenZhen Click TechnologyLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ShenZhen Click TechnologyLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, ShenZhen Click TechnologyLTD's EBIT dived 20%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ShenZhen Click TechnologyLTD can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ShenZhen Click TechnologyLTD 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 Click TechnologyLTD produced sturdy free cash flow equating to 76% 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 Click TechnologyLTD has CN¥577.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in CN¥359m. So we are not troubled with ShenZhen Click TechnologyLTD's debt use. 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 2 warning signs we've spotted with ShenZhen Click TechnologyLTD .

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.