We Think Shenzhen Kingdom Sci-Tech (SHSE:600446) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shenzhen Kingdom Sci-Tech Co., Ltd (SHSE:600446) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen Kingdom Sci-Tech

How Much Debt Does Shenzhen Kingdom Sci-Tech Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Kingdom Sci-Tech had debt of CN¥936.0m at the end of September 2024, a reduction from CN¥1.55b over a year. But it also has CN¥1.92b in cash to offset that, meaning it has CN¥984.2m net cash.

How Healthy Is Shenzhen Kingdom Sci-Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Kingdom Sci-Tech had liabilities of CN¥2.01b due within 12 months and liabilities of CN¥35.7m due beyond that. Offsetting this, it had CN¥1.92b in cash and CN¥1.43b in receivables that were due within 12 months. So it actually has CN¥1.30b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Kingdom Sci-Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shenzhen Kingdom Sci-Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shenzhen Kingdom Sci-Tech grew its EBIT by 36% 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 it is future earnings, more than anything, that will determine Shenzhen Kingdom Sci-Tech'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. Shenzhen Kingdom Sci-Tech 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. Happily for any shareholders, Shenzhen Kingdom Sci-Tech actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Kingdom Sci-Tech has CN¥984.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥660m, being 139% of its EBIT. So we don't think Shenzhen Kingdom Sci-Tech's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shenzhen Kingdom Sci-Tech's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.