Is Shenzhen Urban Transport Planning Center (SZSE:301091) Using Too Much 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.' 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 can see that Shenzhen Urban Transport Planning Center Co., Ltd. (SZSE:301091) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shenzhen Urban Transport Planning Center

How Much Debt Does Shenzhen Urban Transport Planning Center Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Urban Transport Planning Center had debt of CN¥49.3m at the end of March 2024, a reduction from CN¥70.9m over a year. However, it does have CN¥987.2m in cash offsetting this, leading to net cash of CN¥937.9m.

A Look At Shenzhen Urban Transport Planning Center's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenzhen Urban Transport Planning Center had liabilities of CN¥708.3m due within 12 months and liabilities of CN¥93.8m due beyond that. Offsetting this, it had CN¥987.2m in cash and CN¥1.14b in receivables that were due within 12 months. So it can boast CN¥1.33b more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Urban Transport Planning Center could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shenzhen Urban Transport Planning Center has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shenzhen Urban Transport Planning Center has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. 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 Urban Transport Planning Center can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shenzhen Urban Transport Planning Center 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 Urban Transport Planning Center burned a lot of cash. 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 Urban Transport Planning Center has net cash of CN¥937.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 45% over the last year. So we are not troubled with Shenzhen Urban Transport Planning Center's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shenzhen Urban Transport Planning Center (of which 1 is a bit concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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