Is Shenzhen Colibri Technologies (SZSE:002957) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Shenzhen Colibri Technologies Co., Ltd. (SZSE:002957) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

As you can see below, Shenzhen Colibri Technologies had CN¥536.5m of debt at March 2024, down from CN¥559.8m a year prior. But it also has CN¥843.9m in cash to offset that, meaning it has CN¥307.4m net cash.

A Look At Shenzhen Colibri Technologies' Liabilities

According to the last reported balance sheet, Shenzhen Colibri Technologies had liabilities of CN¥2.55b due within 12 months, and liabilities of CN¥106.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥843.9m as well as receivables valued at CN¥1.84b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Shenzhen Colibri Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥5.49b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shenzhen Colibri Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shenzhen Colibri Technologies's load is not too heavy, because its EBIT was down 48% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Colibri Technologies 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 Colibri Technologies 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 Colibri Technologies burned a lot of cash. 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¥307.4m, as well as more liquid assets than liabilities. So while Shenzhen Colibri Technologies does not have a great balance sheet, it's certainly not too bad. 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 - Shenzhen Colibri Technologies has 2 warning signs we think you should be aware of.

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.