Is Shenzhen Manst Technology (SZSE:301325) Using Too Much Debt?

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. Importantly, Shenzhen Manst Technology Co., Ltd. (SZSE:301325) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Shenzhen Manst Technology

What Is Shenzhen Manst Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Shenzhen Manst Technology had debt of CN¥775.4m, up from none in one year. However, its balance sheet shows it holds CN¥1.82b in cash, so it actually has CN¥1.05b net cash.

How Strong Is Shenzhen Manst Technology's Balance Sheet?

According to the last reported balance sheet, Shenzhen Manst Technology had liabilities of CN¥1.54b due within 12 months, and liabilities of CN¥127.3m due beyond 12 months. On the other hand, it had cash of CN¥1.82b and CN¥808.9m worth of receivables due within a year. So it can boast CN¥966.3m 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. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Shenzhen Manst Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shenzhen Manst Technology's saving grace is its low debt levels, because its EBIT has tanked 31% 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. During the last three years, Shenzhen Manst Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Manst Technology has CN¥1.05b in net cash and a decent-looking balance sheet. So we don't have any problem with Shenzhen Manst Technology's use of debt. 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. Case in point: We've spotted 3 warning signs for Shenzhen Manst Technology you should be aware of, and 1 of them is significant.

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.