Shenzhen VAPEL Power Supply Technology (SZSE:301516) Has A Pretty Healthy Balance Sheet

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. We note that Shenzhen VAPEL Power Supply Technology Co., Ltd. (SZSE:301516) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenzhen VAPEL Power Supply Technology

How Much Debt Does Shenzhen VAPEL Power Supply Technology Carry?

As you can see below, Shenzhen VAPEL Power Supply Technology had CN¥64.7m of debt at March 2024, down from CN¥228.1m a year prior. However, its balance sheet shows it holds CN¥296.0m in cash, so it actually has CN¥231.4m net cash.

How Healthy Is Shenzhen VAPEL Power Supply Technology's Balance Sheet?

The latest balance sheet data shows that Shenzhen VAPEL Power Supply Technology had liabilities of CN¥364.9m due within a year, and liabilities of CN¥10.2m falling due after that. Offsetting this, it had CN¥296.0m in cash and CN¥282.0m in receivables that were due within 12 months. So it actually has CN¥202.8m more liquid assets than total liabilities.

This surplus suggests that Shenzhen VAPEL Power Supply Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen VAPEL Power Supply Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shenzhen VAPEL Power Supply Technology if management cannot prevent a repeat of the 60% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen VAPEL Power Supply Technology 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen VAPEL Power Supply 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. During the last three years, Shenzhen VAPEL Power Supply Technology produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen VAPEL Power Supply Technology has net cash of CN¥231.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in CN¥114m. So we are not troubled with Shenzhen VAPEL Power Supply Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Shenzhen VAPEL Power Supply Technology (1 can't be ignored!) that you should be aware of before investing here.

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.