Shenzhen SEGLtd (SZSE:000058) Seems To Use Debt Rather Sparingly

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 SEG Co.,Ltd (SZSE:000058) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Shenzhen SEGLtd

What Is Shenzhen SEGLtd's Debt?

As you can see below, at the end of September 2023, Shenzhen SEGLtd had CN¥808.3m of debt, up from CN¥760.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.09b in cash, leading to a CN¥284.0m net cash position.

How Strong Is Shenzhen SEGLtd's Balance Sheet?

The latest balance sheet data shows that Shenzhen SEGLtd had liabilities of CN¥2.00b due within a year, and liabilities of CN¥747.0m falling due after that. On the other hand, it had cash of CN¥1.09b and CN¥454.3m worth of receivables due within a year. So it has liabilities totalling CN¥1.20b more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen SEGLtd shares are worth a total of CN¥6.88b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Shenzhen SEGLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shenzhen SEGLtd grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen SEGLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen SEGLtd 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, 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

Although Shenzhen SEGLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥284.0m. The cherry on top was that in converted 231% of that EBIT to free cash flow, bringing in CN¥207m. So we don't think Shenzhen SEGLtd's use of debt is risky. 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 - Shenzhen SEGLtd has 1 warning sign we think 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.