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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shenzhen Goodix Technology Co., Ltd. (SHSE:603160) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View 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¥449.7m at the end of September 2024, a reduction from CN¥543.8m over a year. But on the other hand it also has CN¥4.36b in cash, leading to a CN¥3.91b net cash position.

A Look At Shenzhen Goodix Technology's Liabilities

The latest balance sheet data shows that Shenzhen Goodix Technology had liabilities of CN¥1.13b due within a year, and liabilities of CN¥330.9m falling due after that. On the other hand, it had cash of CN¥4.36b and CN¥542.4m worth of receivables due within a year. So it actually has CN¥3.44b 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!

It was also good to see that despite losing money on the EBIT line last year, Shenzhen Goodix Technology turned things around in the last 12 months, delivering and EBIT of CN¥145m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Goodix Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Goodix Technology has net cash of CN¥3.91b, as well as more liquid assets than liabilities. The cherry on top was that in converted 504% of that EBIT to free cash flow, bringing in CN¥730m. So is Shenzhen Goodix Technology's debt a risk? It doesn't seem so to us. 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. Be aware that Shenzhen Goodix Technology is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.