These 4 Measures Indicate That Shenzhen Prince New MaterialsLtd (SZSE:002735) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shenzhen Prince New Materials Co.,Ltd. (SZSE:002735) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Shenzhen Prince New MaterialsLtd

How Much Debt Does Shenzhen Prince New MaterialsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Prince New MaterialsLtd had CN¥268.9m of debt in March 2024, down from CN¥347.0m, one year before. However, its balance sheet shows it holds CN¥776.8m in cash, so it actually has CN¥507.9m net cash.

A Look At Shenzhen Prince New MaterialsLtd's Liabilities

The latest balance sheet data shows that Shenzhen Prince New MaterialsLtd had liabilities of CN¥880.3m due within a year, and liabilities of CN¥72.9m falling due after that. On the other hand, it had cash of CN¥776.8m and CN¥814.8m worth of receivables due within a year. So it actually has CN¥638.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Prince New MaterialsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Prince New MaterialsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shenzhen Prince New MaterialsLtd grew its EBIT by 53% 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 ultimately the future profitability of the business will decide if Shenzhen Prince New MaterialsLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen Prince New MaterialsLtd 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. Considering the last three years, Shenzhen Prince New MaterialsLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Prince New MaterialsLtd has CN¥507.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 53% year-on-year EBIT growth. So is Shenzhen Prince New MaterialsLtd's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Shenzhen Prince New MaterialsLtd you should be aware of, and 1 of them doesn't sit too well with us.

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.