Shenzhen Bluetrum Technology (SHSE:688332) Has A Rock Solid Balance Sheet

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.' 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 Bluetrum Technology Co., Ltd. (SHSE:688332) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shenzhen Bluetrum Technology

What Is Shenzhen Bluetrum Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Bluetrum Technology had CN¥1.10b of debt, an increase on CN¥121.2m, over one year. However, it does have CN¥3.97b in cash offsetting this, leading to net cash of CN¥2.87b.

A Look At Shenzhen Bluetrum Technology's Liabilities

We can see from the most recent balance sheet that Shenzhen Bluetrum Technology had liabilities of CN¥1.25b falling due within a year, and liabilities of CN¥2.95m due beyond that. Offsetting this, it had CN¥3.97b in cash and CN¥56.5m in receivables that were due within 12 months. So it actually has CN¥2.78b more liquid assets than total liabilities.

This surplus strongly suggests that Shenzhen Bluetrum Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Shenzhen Bluetrum Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shenzhen Bluetrum Technology has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Bluetrum 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Shenzhen Bluetrum Technology recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Bluetrum Technology has CN¥2.87b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 62% over the last year. So we don't think Shenzhen Bluetrum Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Shenzhen Bluetrum Technology (1 can't be ignored!) that you should be aware of before investing here.

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.