Shenzhen Urban Transport Planning Center (SZSE:301091) Has A Pretty Healthy Balance Sheet

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. Importantly, Shenzhen Urban Transport Planning Center Co., Ltd. (SZSE:301091) does carry debt. But should shareholders be worried about its use of debt?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Urban Transport Planning Center

What Is Shenzhen Urban Transport Planning Center's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Urban Transport Planning Center had debt of CN¥48.3m at the end of September 2024, a reduction from CN¥57.9m over a year. But it also has CN¥645.7m in cash to offset that, meaning it has CN¥597.4m net cash.

How Healthy Is Shenzhen Urban Transport Planning Center's Balance Sheet?

According to the last reported balance sheet, Shenzhen Urban Transport Planning Center had liabilities of CN¥706.9m due within 12 months, and liabilities of CN¥101.4m due beyond 12 months. Offsetting this, it had CN¥645.7m in cash and CN¥1.39b in receivables that were due within 12 months. So it actually has CN¥1.22b 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.

On top of that, Shenzhen Urban Transport Planning Center grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 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. 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. Over the last three years, Shenzhen Urban Transport Planning Center 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 Urban Transport Planning Center has net cash of CN¥597.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 65% over the last year. So we don't have any problem with Shenzhen Urban Transport Planning Center's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shenzhen Urban Transport Planning Center that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.