Is Shenzhen S.C New Energy Technology (SZSE:300724) Using Too Much Debt?

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 S.C New Energy Technology Corporation (SZSE:300724) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen S.C New Energy Technology

What Is Shenzhen S.C New Energy Technology's Debt?

As you can see below, Shenzhen S.C New Energy Technology had CN¥282.2m of debt at September 2024, down from CN¥327.2m a year prior. But on the other hand it also has CN¥8.49b in cash, leading to a CN¥8.21b net cash position.

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

We can see from the most recent balance sheet that Shenzhen S.C New Energy Technology had liabilities of CN¥26.8b falling due within a year, and liabilities of CN¥252.7m due beyond that. Offsetting these obligations, it had cash of CN¥8.49b as well as receivables valued at CN¥6.79b due within 12 months. So it has liabilities totalling CN¥11.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shenzhen S.C New Energy Technology is worth CN¥21.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 91% over the last twelve months, and that growth will make it easier to handle its debt. 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 S.C New Energy Technology can strengthen its balance sheet over time. 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. Shenzhen S.C New Energy 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. Over the last three years, Shenzhen S.C New Energy Technology actually produced more free cash flow than EBIT. 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¥8.21b. And it impressed us with free cash flow of CN¥1.8b, being 133% of its EBIT. So is Shenzhen S.C New Energy 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shenzhen S.C New Energy Technology has 1 warning sign we think 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.