Here's Why Shandong Linuo Technical GlassLtd (SZSE:301188) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Shandong Linuo Technical Glass Co.,Ltd. (SZSE:301188) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Shandong Linuo Technical GlassLtd

What Is Shandong Linuo Technical GlassLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Shandong Linuo Technical GlassLtd had debt of CN¥383.6m, up from none in one year. But on the other hand it also has CN¥756.9m in cash, leading to a CN¥373.3m net cash position.

A Look At Shandong Linuo Technical GlassLtd's Liabilities

The latest balance sheet data shows that Shandong Linuo Technical GlassLtd had liabilities of CN¥229.0m due within a year, and liabilities of CN¥406.6m falling due after that. Offsetting this, it had CN¥756.9m in cash and CN¥303.5m in receivables that were due within 12 months. So it actually has CN¥424.8m more liquid assets than total liabilities.

This surplus suggests that Shandong Linuo Technical GlassLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shandong Linuo Technical GlassLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Shandong Linuo Technical GlassLtd grew its EBIT by 11% last year, making its debt load easier to handle. 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 Shandong Linuo Technical GlassLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shandong Linuo Technical GlassLtd 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, Shandong Linuo Technical GlassLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shandong Linuo Technical GlassLtd has net cash of CN¥373.3m, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So we don't have any problem with Shandong Linuo Technical GlassLtd'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 example, we've discovered 1 warning sign for Shandong Linuo Technical GlassLtd that you should be aware of before investing here.

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.