Is Shenzhen Lifotronic Technology (SHSE:688389) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shenzhen Lifotronic Technology Co., Ltd. (SHSE:688389) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shenzhen Lifotronic Technology

What Is Shenzhen Lifotronic Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shenzhen Lifotronic Technology had CN¥300.0m of debt, an increase on CN¥235.0m, over one year. But on the other hand it also has CN¥1.33b in cash, leading to a CN¥1.03b net cash position.

How Strong Is Shenzhen Lifotronic Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Lifotronic Technology had liabilities of CN¥550.1m due within 12 months and liabilities of CN¥4.42m due beyond that. Offsetting these obligations, it had cash of CN¥1.33b as well as receivables valued at CN¥194.1m due within 12 months. So it can boast CN¥972.2m more liquid assets than total liabilities.

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

On top of that, Shenzhen Lifotronic Technology grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Lifotronic Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen Lifotronic 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 Lifotronic Technology produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Lifotronic Technology has net cash of CN¥1.03b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So we don't think Shenzhen Lifotronic Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Shenzhen Lifotronic Technology , and understanding them should be part of your investment process.

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.

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

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.