We Think Shandong Shuangyi Technology (SZSE:300690) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Shandong Shuangyi Technology Co., Ltd. (SZSE:300690) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shandong Shuangyi Technology

How Much Debt Does Shandong Shuangyi Technology Carry?

The chart below, which you can click on for greater detail, shows that Shandong Shuangyi Technology had CN¥20.0m in debt in September 2024; about the same as the year before. But it also has CN¥472.6m in cash to offset that, meaning it has CN¥452.6m net cash.

How Strong Is Shandong Shuangyi Technology's Balance Sheet?

The latest balance sheet data shows that Shandong Shuangyi Technology had liabilities of CN¥371.3m due within a year, and liabilities of CN¥29.5m falling due after that. Offsetting these obligations, it had cash of CN¥472.6m as well as receivables valued at CN¥554.4m due within 12 months. So it actually has CN¥626.3m more liquid assets than total liabilities.

It's good to see that Shandong Shuangyi Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Shandong Shuangyi Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shandong Shuangyi Technology's load is not too heavy, because its EBIT was down 28% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shandong Shuangyi Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shandong Shuangyi 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 most recent three years, Shandong Shuangyi Technology recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shandong Shuangyi Technology has CN¥452.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Shandong Shuangyi Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Shandong Shuangyi Technology (including 1 which is potentially serious) .

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.