Is Shenzhen Changhong Technology (SZSE:300151) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shenzhen Changhong Technology Co., Ltd. (SZSE:300151) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Shenzhen Changhong Technology

What Is Shenzhen Changhong Technology's Net Debt?

As you can see below, Shenzhen Changhong Technology had CN¥613.3m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥682.3m in cash offsetting this, leading to net cash of CN¥69.1m.

A Look At Shenzhen Changhong Technology's Liabilities

We can see from the most recent balance sheet that Shenzhen Changhong Technology had liabilities of CN¥298.3m falling due within a year, and liabilities of CN¥554.8m due beyond that. On the other hand, it had cash of CN¥682.3m and CN¥276.2m worth of receivables due within a year. So it can boast CN¥105.4m more liquid assets than total liabilities.

Having regard to Shenzhen Changhong Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥7.96b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shenzhen Changhong Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Shenzhen Changhong Technology grew its EBIT by 6.9% in the last year, making that debt load look even more manageable. 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 Changhong Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhen Changhong Technology 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. Over the last three years, Shenzhen Changhong Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Changhong Technology has CN¥69.1m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.9% in the last twelve months. So we are not troubled with Shenzhen Changhong Technology's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shenzhen Changhong Technology (of which 1 can't be ignored!) you should know about.

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.