Shenzhen Bluetrum Technology (SHSE:688332) Seems To Use Debt Rather Sparingly

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. We note that Shenzhen Bluetrum Technology Co., Ltd. (SHSE:688332) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Bluetrum Technology's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Bluetrum Technology had debt of CN¥477.6m at the end of September 2024, a reduction from CN¥850.3m 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.

How Healthy Is Shenzhen Bluetrum Technology's Balance Sheet?

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 can boast CN¥2.85b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Bluetrum Technology is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shenzhen Bluetrum Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Shenzhen Bluetrum Technology

Even more impressive was the fact that Shenzhen Bluetrum Technology grew its EBIT by 153% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen Bluetrum 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. Over the most recent three years, Shenzhen Bluetrum Technology recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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 we liked the look of last year's 153% year-on-year EBIT growth. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Shenzhen Bluetrum Technology (including 1 which can't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.