Is Shenzhen SEGLtd (SZSE:000058) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Shenzhen SEG Co.,Ltd (SZSE:000058) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 SEGLtd

What Is Shenzhen SEGLtd's Debt?

The chart below, which you can click on for greater detail, shows that Shenzhen SEGLtd had CN¥842.0m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥1.22b in cash, so it actually has CN¥375.3m net cash.

How Strong Is Shenzhen SEGLtd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen SEGLtd had liabilities of CN¥2.10b falling due within a year, and liabilities of CN¥723.4m due beyond that. Offsetting these obligations, it had cash of CN¥1.22b as well as receivables valued at CN¥453.2m due within 12 months. So its liabilities total CN¥1.15b more than the combination of its cash and short-term receivables.

Given Shenzhen SEGLtd has a market capitalization of CN¥6.06b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shenzhen SEGLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Shenzhen SEGLtd's saving grace is its low debt levels, because its EBIT has tanked 77% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen SEGLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shenzhen SEGLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Shenzhen SEGLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Shenzhen SEGLtd does have more liabilities than liquid assets, it also has net cash of CN¥375.3m. And it impressed us with free cash flow of CN¥346m, being 375% of its EBIT. So we don't have any problem with Shenzhen SEGLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shenzhen SEGLtd you should be aware of.

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.