ShenZhen Click TechnologyLTD (SZSE:002782) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that ShenZhen Click Technology Co.,LTD. (SZSE:002782) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ShenZhen Click TechnologyLTD

What Is ShenZhen Click TechnologyLTD's Net Debt?

The image below, which you can click on for greater detail, shows that ShenZhen Click TechnologyLTD had debt of CN¥206.9m at the end of March 2024, a reduction from CN¥240.2m over a year. But it also has CN¥566.4m in cash to offset that, meaning it has CN¥359.5m net cash.

How Healthy Is ShenZhen Click TechnologyLTD's Balance Sheet?

We can see from the most recent balance sheet that ShenZhen Click TechnologyLTD had liabilities of CN¥1.81b falling due within a year, and liabilities of CN¥154.5m due beyond that. Offsetting this, it had CN¥566.4m in cash and CN¥1.69b in receivables that were due within 12 months. So it actually has CN¥296.7m 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. Simply put, the fact that ShenZhen Click TechnologyLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that ShenZhen Click TechnologyLTD saw its EBIT decline by 4.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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. Over the last three years, ShenZhen Click TechnologyLTD reported free cash flow worth 15% 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

While we empathize with investors who find debt concerning, you should keep in mind that ShenZhen Click TechnologyLTD has net cash of CN¥359.5m, as well as more liquid assets than liabilities. So we don't have any problem with ShenZhen Click TechnologyLTD'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. For example, we've discovered 2 warning signs for ShenZhen Click TechnologyLTD that you should be aware of before investing here.

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.