Here's Why Shenzhen Manst Technology (SZSE:301325) Can Manage Its Debt Responsibly

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. We note that Shenzhen Manst Technology Co., Ltd. (SZSE:301325) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 March 2024, Shenzhen Manst Technology had CN¥304.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.90b in cash, so it actually has CN¥1.60b net cash.

How Strong Is Shenzhen Manst Technology's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Manst Technology had liabilities of CN¥761.3m falling due within a year, and liabilities of CN¥74.5m due beyond that. Offsetting this, it had CN¥1.90b in cash and CN¥785.1m in receivables that were due within 12 months. So it actually has CN¥1.85b 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.

And we also note warmly that Shenzhen Manst Technology grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Manst 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 company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen Manst Technology 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. 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 we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Manst Technology has net cash of CN¥1.60b, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we don't have any problem with Shenzhen Manst Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Shenzhen Manst Technology (2 are a bit unpleasant) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com