These 4 Measures Indicate That Shenzhen Changhong Technology (SZSE:300151) Is Using Debt Extensively

Warren Buffett famously said, '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 can see that Shenzhen Changhong Technology Co., Ltd. (SZSE:300151) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does Shenzhen Changhong Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Changhong Technology had CN¥635.8m of debt, an increase on CN¥608.0m, over one year. But it also has CN¥838.3m in cash to offset that, meaning it has CN¥202.5m net cash.

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¥267.0m falling due within a year, and liabilities of CN¥584.3m due beyond that. On the other hand, it had cash of CN¥838.3m and CN¥215.6m worth of receivables due within a year. So it can boast CN¥202.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Changhong Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Changhong Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Shenzhen Changhong Technology's EBIT fell a jaw-dropping 93% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Changhong Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Shenzhen Changhong Technology burned a lot of cash. 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¥202.5m in net cash and a decent-looking balance sheet. Despite the cash, we do find Shenzhen Changhong Technology's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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. For instance, we've identified 3 warning signs for Shenzhen Changhong Technology that you should be aware of.

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.