Shenzhen Farben Information TechnologyLtd (SZSE:300925) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Shenzhen Farben Information Technology Co.,Ltd. (SZSE:300925) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen Farben Information TechnologyLtd

How Much Debt Does Shenzhen Farben Information TechnologyLtd Carry?

As you can see below, Shenzhen Farben Information TechnologyLtd had CN¥162.0m of debt at June 2024, down from CN¥631.2m a year prior. However, it does have CN¥1.03b in cash offsetting this, leading to net cash of CN¥866.0m.

How Strong Is Shenzhen Farben Information TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Shenzhen Farben Information TechnologyLtd had liabilities of CN¥646.9m due within 12 months, and liabilities of CN¥9.71m due beyond 12 months. Offsetting this, it had CN¥1.03b in cash and CN¥1.49b in receivables that were due within 12 months. So it actually has CN¥1.86b more liquid assets than total liabilities.

This surplus liquidity suggests that Shenzhen Farben Information TechnologyLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Shenzhen Farben Information TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shenzhen Farben Information TechnologyLtd grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Farben Information TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen Farben Information TechnologyLtd 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. Over the last three years, Shenzhen Farben Information TechnologyLtd reported free cash flow worth 16% of its EBIT, which is really quite low. 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 Farben Information TechnologyLtd has net cash of CN¥866.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 30% year-on-year EBIT growth. So is Shenzhen Farben Information TechnologyLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Shenzhen Farben Information TechnologyLtd .

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.