Shenzhen Bluetrum Technology (SHSE:688332) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Bluetrum Technology Co., Ltd. (SHSE:688332) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Bluetrum Technology

How Much Debt Does Shenzhen Bluetrum Technology Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Bluetrum Technology had debt of CN¥473.5m at the end of September 2024, a reduction from CN¥757.7m over a year. But on the other hand it also has CN¥3.36b in cash, leading to a CN¥2.89b net cash position.

A Look At Shenzhen Bluetrum Technology's Liabilities

According to the last reported balance sheet, Shenzhen Bluetrum Technology had liabilities of CN¥574.2m due within 12 months, and liabilities of CN¥5.00m due beyond 12 months. On the other hand, it had cash of CN¥3.36b and CN¥65.9m worth of receivables due within a year. So it actually has CN¥2.85b more liquid assets than total liabilities.

It's good to see that Shenzhen Bluetrum Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Shenzhen Bluetrum Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shenzhen Bluetrum Technology has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Bluetrum 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shenzhen Bluetrum Technology 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. In the last three years, Shenzhen Bluetrum Technology's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Bluetrum Technology has CN¥2.89b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 42% over the last year. So is Shenzhen Bluetrum Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Shenzhen Bluetrum Technology has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.