Does Shenzhen Envicool Technology (SZSE:002837) Have A 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. As with many other companies Shenzhen Envicool Technology Co., Ltd. (SZSE:002837) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Shenzhen Envicool Technology

How Much Debt Does Shenzhen Envicool Technology Carry?

As you can see below, at the end of September 2024, Shenzhen Envicool Technology had CN¥694.0m of debt, up from CN¥518.4m a year ago. Click the image for more detail. But it also has CN¥887.4m in cash to offset that, meaning it has CN¥193.5m net cash.

A Look At Shenzhen Envicool Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenzhen Envicool Technology had liabilities of CN¥2.50b due within 12 months and liabilities of CN¥307.3m due beyond that. On the other hand, it had cash of CN¥887.4m and CN¥2.45b worth of receivables due within a year. So it can boast CN¥533.3m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Envicool Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shenzhen Envicool Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shenzhen Envicool Technology has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Envicool Technology 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. Shenzhen Envicool Technology 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. In the last three years, Shenzhen Envicool Technology's free cash flow amounted to 31% 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 Envicool Technology has CN¥193.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 44% over the last year. So is Shenzhen Envicool Technology's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Shenzhen Envicool Technology, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.