These 4 Measures Indicate That Shenzhen Ysstech Info-TechLtd (SZSE:300377) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Ysstech Info-Tech Co.,Ltd (SZSE:300377) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shenzhen Ysstech Info-TechLtd

What Is Shenzhen Ysstech Info-TechLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Ysstech Info-TechLtd had debt of CN¥50.0m, up from none in one year. However, its balance sheet shows it holds CN¥184.8m in cash, so it actually has CN¥134.8m net cash.

A Look At Shenzhen Ysstech Info-TechLtd's Liabilities

According to the last reported balance sheet, Shenzhen Ysstech Info-TechLtd had liabilities of CN¥317.1m due within 12 months, and liabilities of CN¥68.7m due beyond 12 months. On the other hand, it had cash of CN¥184.8m and CN¥1.11b worth of receivables due within a year. So it can boast CN¥905.3m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Ysstech Info-TechLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shenzhen Ysstech Info-TechLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shenzhen Ysstech Info-TechLtd grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Ysstech Info-TechLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen Ysstech Info-TechLtd 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. In the last two years, Shenzhen Ysstech Info-TechLtd created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Ysstech Info-TechLtd has net cash of CN¥134.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 54% over the last year. So is Shenzhen Ysstech Info-TechLtd'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. We've identified 4 warning signs with Shenzhen Ysstech Info-TechLtd (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.