Is Shenzhen Fortune Trend technology (SHSE:688318) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Shenzhen Fortune Trend technology Co., Ltd. (SHSE:688318) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shenzhen Fortune Trend technology

What Is Shenzhen Fortune Trend technology's Net Debt?

As you can see below, at the end of September 2024, Shenzhen Fortune Trend technology had CN¥70.0m of debt, up from CN¥30.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.85b in cash, so it actually has CN¥1.78b net cash.

A Look At Shenzhen Fortune Trend technology's Liabilities

The latest balance sheet data shows that Shenzhen Fortune Trend technology had liabilities of CN¥209.3m due within a year, and liabilities of CN¥12.8m falling due after that. Offsetting these obligations, it had cash of CN¥1.85b as well as receivables valued at CN¥39.9m due within 12 months. So it can boast CN¥1.67b more liquid assets than total liabilities.

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

The good news is that Shenzhen Fortune Trend technology has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shenzhen Fortune Trend technology can strengthen its balance sheet over time. 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 Fortune Trend 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 Fortune Trend technology recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Fortune Trend technology has CN¥1.78b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥143m, being 87% of its EBIT. So is Shenzhen Fortune Trend technology's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Shenzhen Fortune Trend technology that you should be aware of.

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.