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

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. Importantly, Shenzhen Inovance Technology Co.,Ltd (SZSE:300124) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shenzhen Inovance TechnologyLtd

What Is Shenzhen Inovance TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Inovance TechnologyLtd had debt of CN¥4.26b at the end of September 2024, a reduction from CN¥4.56b over a year. But on the other hand it also has CN¥4.51b in cash, leading to a CN¥252.6m net cash position.

How Healthy Is Shenzhen Inovance TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Shenzhen Inovance TechnologyLtd had liabilities of CN¥21.0b due within a year, and liabilities of CN¥5.15b falling due after that. On the other hand, it had cash of CN¥4.51b and CN¥15.9b worth of receivables due within a year. So its liabilities total CN¥5.72b more than the combination of its cash and short-term receivables.

Given Shenzhen Inovance TechnologyLtd has a humongous market capitalization of CN¥198.8b, it's hard to believe these liabilities pose much 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 Inovance TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Shenzhen Inovance TechnologyLtd grew its EBIT by 16% last year, making its debt load easier to handle. 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. While Shenzhen Inovance TechnologyLtd 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. 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

We could understand if investors are concerned about Shenzhen Inovance TechnologyLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥252.6m. And it impressed us with its EBIT growth of 16% over the last year. So is Shenzhen Inovance TechnologyLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shenzhen Inovance TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.