Is Shenzhen Inovance TechnologyLtd (SZSE:300124) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Inovance Technology Co.,Ltd (SZSE:300124) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Inovance TechnologyLtd

How Much Debt Does Shenzhen Inovance TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Inovance TechnologyLtd had CN¥4.26b of debt in September 2024, down from CN¥4.56b, one year before. However, its balance sheet shows it holds CN¥4.51b in cash, so it actually has CN¥252.6m net cash.

How Strong Is Shenzhen Inovance TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Shenzhen Inovance TechnologyLtd had liabilities of CN¥21.0b due within 12 months, and liabilities of CN¥5.15b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.51b as well as receivables valued at CN¥15.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.72b.

Since publicly traded Shenzhen Inovance TechnologyLtd shares are worth a very impressive total of CN¥160.5b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Shenzhen Inovance TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Shenzhen Inovance TechnologyLtd grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Inovance TechnologyLtd's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. Shenzhen Inovance 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. During the last three years, Shenzhen Inovance TechnologyLtd produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shenzhen Inovance TechnologyLtd has CN¥252.6m in net cash. And it impressed us with its EBIT growth of 16% over the last year. So we don't think Shenzhen Inovance TechnologyLtd's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Shenzhen Inovance TechnologyLtd 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.