Shenzhen Inovance TechnologyLtd (SZSE:300124) Seems To Use Debt Quite Sensibly

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 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 can see that Shenzhen Inovance Technology Co.,Ltd (SZSE:300124) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Debt?

The chart below, which you can click on for greater detail, shows that Shenzhen Inovance TechnologyLtd had CN¥4.56b in debt in September 2023; about the same as the year before. However, its balance sheet shows it holds CN¥7.97b in cash, so it actually has CN¥3.41b net cash.

How Strong Is Shenzhen Inovance TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Inovance TechnologyLtd had liabilities of CN¥16.2b falling due within a year, and liabilities of CN¥3.81b due beyond that. Offsetting these obligations, it had cash of CN¥7.97b as well as receivables valued at CN¥11.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥409.0m.

Having regard to Shenzhen Inovance TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥171.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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. 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 Inovance TechnologyLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Shenzhen Inovance TechnologyLtd's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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¥3.41b. And we liked the look of last year's 16% year-on-year EBIT growth. So we don't think Shenzhen Inovance TechnologyLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Shenzhen Inovance TechnologyLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.