Shenzhen Capchem Technology (SZSE:300037) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Shenzhen Capchem Technology Co., Ltd. (SZSE:300037) 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Capchem Technology

How Much Debt Does Shenzhen Capchem Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Capchem Technology had debt of CN¥3.13b, up from CN¥2.76b in one year. However, it does have CN¥5.30b in cash offsetting this, leading to net cash of CN¥2.17b.

A Look At Shenzhen Capchem Technology's Liabilities

We can see from the most recent balance sheet that Shenzhen Capchem Technology had liabilities of CN¥4.46b falling due within a year, and liabilities of CN¥2.65b due beyond that. Offsetting this, it had CN¥5.30b in cash and CN¥3.32b in receivables that were due within 12 months. So it actually has CN¥1.52b more liquid assets than total liabilities.

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

In fact Shenzhen Capchem Technology's saving grace is its low debt levels, because its EBIT has tanked 40% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Capchem Technology's ability to maintain a healthy balance sheet going forward. 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 Capchem 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. Looking at the most recent three years, Shenzhen Capchem Technology recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Capchem Technology has CN¥2.17b in net cash and a decent-looking balance sheet. So we are not troubled with Shenzhen Capchem Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenzhen Capchem Technology you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.