These 4 Measures Indicate That Longshine Technology Group (SZSE:300682) 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.' 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 Longshine Technology Group Co., Ltd. (SZSE:300682) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Longshine Technology Group

What Is Longshine Technology Group's Net Debt?

As you can see below, Longshine Technology Group had CN¥531.5m of debt at March 2024, down from CN¥914.9m a year prior. But it also has CN¥1.45b in cash to offset that, meaning it has CN¥914.9m net cash.

A Look At Longshine Technology Group's Liabilities

According to the last reported balance sheet, Longshine Technology Group had liabilities of CN¥1.66b due within 12 months, and liabilities of CN¥570.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.45b as well as receivables valued at CN¥3.78b due within 12 months. So it can boast CN¥2.99b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Longshine Technology Group 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 Longshine Technology Group has boosted its EBIT by 37%, 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 Longshine Technology Group 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.

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. In the last three years, Longshine Technology Group's free cash flow amounted to 26% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Longshine Technology Group has net cash of CN¥914.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 37% year-on-year EBIT growth. So we don't think Longshine Technology Group's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Longshine Technology Group you should know about.

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.