Does Shenzhen Manst Technology (SZSE:301325) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Shenzhen Manst Technology Co., Ltd. (SZSE:301325) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Manst Technology

What Is Shenzhen Manst Technology's Net Debt?

As you can see below, at the end of September 2024, Shenzhen Manst Technology had CN¥894.6m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥1.76b in cash offsetting this, leading to net cash of CN¥861.8m.

How Healthy Is Shenzhen Manst Technology's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Manst Technology had liabilities of CN¥1.60b falling due within a year, and liabilities of CN¥128.7m due beyond that. Offsetting this, it had CN¥1.76b in cash and CN¥1.26b in receivables that were due within 12 months. So it can boast CN¥1.29b more liquid assets than total liabilities.

It's good to see that Shenzhen Manst Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shenzhen Manst Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Shenzhen Manst Technology's saving grace is its low debt levels, because its EBIT has tanked 72% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shenzhen Manst Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen Manst 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 Manst 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 Manst Technology has CN¥861.8m in net cash and a decent-looking balance sheet. So we are not troubled with Shenzhen Manst Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Shenzhen Manst Technology (2 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.