Is Longshine Technology Group (SZSE:300682) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Longshine Technology Group Co., Ltd. (SZSE:300682) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Longshine Technology Group

What Is Longshine Technology Group's Debt?

As you can see below, at the end of September 2024, Longshine Technology Group had CN¥888.4m of debt, up from CN¥506.5m a year ago. Click the image for more detail. However, it does have CN¥1.32b in cash offsetting this, leading to net cash of CN¥435.6m.

How Strong Is Longshine Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Longshine Technology Group had liabilities of CN¥1.91b due within 12 months and liabilities of CN¥750.6m due beyond that. Offsetting this, it had CN¥1.32b in cash and CN¥3.72b in receivables that were due within 12 months. So it actually has CN¥2.38b more liquid assets than total liabilities.

This surplus suggests that Longshine Technology Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Longshine Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Longshine Technology Group grew its EBIT by 40% 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 ultimately the future profitability of the business will decide if Longshine Technology Group 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. Longshine Technology Group 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. Looking at the most recent three years, Longshine Technology Group recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Longshine Technology Group has CN¥435.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 40% over the last year. So is Longshine Technology Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Longshine Technology Group is showing 2 warning signs in our investment analysis , you should know about...

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.