Shenzhen Liande Automation Equipmentltd (SZSE:300545) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Shenzhen Liande Automation Equipment co.,ltd. (SZSE:300545) makes use of debt. 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 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Liande Automation Equipmentltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Liande Automation Equipmentltd had CN¥472.7m of debt in September 2024, down from CN¥546.8m, one year before. However, its balance sheet shows it holds CN¥569.8m in cash, so it actually has CN¥97.1m net cash.

A Look At Shenzhen Liande Automation Equipmentltd's Liabilities

The latest balance sheet data shows that Shenzhen Liande Automation Equipmentltd had liabilities of CN¥973.7m due within a year, and liabilities of CN¥233.4m falling due after that. Offsetting these obligations, it had cash of CN¥569.8m as well as receivables valued at CN¥608.7m due within 12 months. So it has liabilities totalling CN¥28.6m more than its cash and near-term receivables, combined.

Having regard to Shenzhen Liande Automation Equipmentltd'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¥5.87b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Shenzhen Liande Automation Equipmentltd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Shenzhen Liande Automation Equipmentltd

In addition to that, we're happy to report that Shenzhen Liande Automation Equipmentltd has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Liande Automation Equipmentltd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen Liande Automation Equipmentltd 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. Looking at the most recent three years, Shenzhen Liande Automation Equipmentltd recorded free cash flow of 31% of its EBIT, which is weaker 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 Liande Automation Equipmentltd's liabilities, but we can be reassured by the fact it has has net cash of CN¥97.1m. And it impressed us with its EBIT growth of 65% over the last year. So is Shenzhen Liande Automation Equipmentltd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shenzhen Liande Automation Equipmentltd's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.