Shenzhen Goodix Technology (SHSE:603160) Seems To Use Debt Rather Sparingly

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 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. Importantly, Shenzhen Goodix Technology Co., Ltd. (SHSE:603160) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Shenzhen Goodix Technology

What Is Shenzhen Goodix Technology's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Goodix Technology had debt of CN¥570.8m at the end of March 2024, a reduction from CN¥778.3m over a year. However, its balance sheet shows it holds CN¥4.33b in cash, so it actually has CN¥3.76b net cash.

How Healthy Is Shenzhen Goodix Technology's Balance Sheet?

The latest balance sheet data shows that Shenzhen Goodix Technology had liabilities of CN¥1.31b due within a year, and liabilities of CN¥350.0m falling due after that. On the other hand, it had cash of CN¥4.33b and CN¥685.7m worth of receivables due within a year. So it can boast CN¥3.36b more liquid assets than total liabilities.

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

Although Shenzhen Goodix Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥177m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Goodix 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen Goodix 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. Happily for any shareholders, Shenzhen Goodix Technology actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Goodix Technology has CN¥3.76b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.6b, being 885% of its EBIT. So we don't think Shenzhen Goodix Technology's use of debt is risky. 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. We've identified 1 warning sign with Shenzhen Goodix Technology , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com