We Think Shenzhen Colibri Technologies (SZSE:002957) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Colibri Technologies

What Is Shenzhen Colibri Technologies's Net Debt?

As you can see below, at the end of September 2023, Shenzhen Colibri Technologies had CN¥647.8m of debt, up from CN¥513.8m a year ago. Click the image for more detail. But it also has CN¥1.05b in cash to offset that, meaning it has CN¥402.5m net cash.

How Strong Is Shenzhen Colibri Technologies' Balance Sheet?

According to the last reported balance sheet, Shenzhen Colibri Technologies had liabilities of CN¥2.89b due within 12 months, and liabilities of CN¥98.7m due beyond 12 months. On the other hand, it had cash of CN¥1.05b and CN¥1.73b worth of receivables due within a year. So it has liabilities totalling CN¥201.3m more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen Colibri Technologies shares are worth a total of CN¥5.85b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shenzhen Colibri Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Shenzhen Colibri Technologies grew its EBIT by 127% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Shenzhen Colibri Technologies has CN¥402.5m in net cash. And it impressed us with its EBIT growth of 127% over the last year. So we don't have any problem with Shenzhen Colibri Technologies's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shenzhen Colibri Technologies , and understanding them should be part of your investment process.

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.