Does Shenzhen S.C New Energy Technology (SZSE:300724) Have A Healthy Balance Sheet?

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.' 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 can see that Shenzhen S.C New Energy Technology Corporation (SZSE:300724) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shenzhen S.C New Energy Technology

How Much Debt Does Shenzhen S.C New Energy Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shenzhen S.C New Energy Technology had CN¥398.1m of debt, an increase on CN¥359.1m, over one year. But it also has CN¥8.31b in cash to offset that, meaning it has CN¥7.91b net cash.

How Healthy Is Shenzhen S.C New Energy Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen S.C New Energy Technology had liabilities of CN¥29.0b due within 12 months and liabilities of CN¥219.1m due beyond that. On the other hand, it had cash of CN¥8.31b and CN¥6.09b worth of receivables due within a year. So its liabilities total CN¥14.9b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥19.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Shenzhen S.C New Energy Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Shenzhen S.C New Energy Technology grew its EBIT by 89% over the last twelve months, and that growth will make it easier to handle its debt. 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 S.C New Energy Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shenzhen S.C New Energy 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 S.C New Energy Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Shenzhen S.C New Energy Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥7.91b. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in CN¥1.3b. So we don't think Shenzhen S.C New Energy Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Shenzhen S.C New Energy Technology (1 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.