Here's Why Shenzhen Colibri Technologies (SZSE:002957) Has A Meaningful Debt Burden

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 note that Shenzhen Colibri Technologies Co., Ltd. (SZSE:002957) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Colibri Technologies

What Is Shenzhen Colibri Technologies's Net Debt?

The chart below, which you can click on for greater detail, shows that Shenzhen Colibri Technologies had CN¥581.8m in debt in June 2024; about the same as the year before. But on the other hand it also has CN¥774.6m in cash, leading to a CN¥192.8m net cash position.

How Strong Is Shenzhen Colibri Technologies' Balance Sheet?

According to the last reported balance sheet, Shenzhen Colibri Technologies had liabilities of CN¥2.42b due within 12 months, and liabilities of CN¥118.5m due beyond 12 months. On the other hand, it had cash of CN¥774.6m and CN¥1.84b worth of receivables due within a year. So it actually has CN¥71.8m more liquid assets than total liabilities.

Having regard to Shenzhen Colibri Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.32b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Shenzhen Colibri Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shenzhen Colibri Technologies's saving grace is its low debt levels, because its EBIT has tanked 53% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Colibri Technologies 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. While Shenzhen Colibri Technologies 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 last three years, Shenzhen Colibri Technologies saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Colibri Technologies has net cash of CN¥192.8m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Shenzhen Colibri Technologies's balance sheet. 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. We've identified 2 warning signs with Shenzhen Colibri Technologies , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.