These 4 Measures Indicate That Shenzhen Fortune Trend technology (SHSE:688318) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Shenzhen Fortune Trend technology Co., Ltd. (SHSE:688318) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shenzhen Fortune Trend technology

What Is Shenzhen Fortune Trend technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shenzhen Fortune Trend technology had CN¥32.0m of debt, an increase on none, over one year. But it also has CN¥995.0m in cash to offset that, meaning it has CN¥963.1m net cash.

How Healthy Is Shenzhen Fortune Trend technology's Balance Sheet?

The latest balance sheet data shows that Shenzhen Fortune Trend technology had liabilities of CN¥177.1m due within a year, and liabilities of CN¥11.4m falling due after that. On the other hand, it had cash of CN¥995.0m and CN¥58.8m worth of receivables due within a year. So it actually has CN¥865.3m 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. Succinctly put, Shenzhen Fortune Trend technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shenzhen Fortune Trend technology has boosted its EBIT by 86%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Shenzhen Fortune Trend technology generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Fortune Trend technology has net cash of CN¥963.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥252m, being 89% of its EBIT. So is Shenzhen Fortune Trend technology's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Shenzhen Fortune Trend technology, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.