We Think Shenzhen Farben Information TechnologyLtd (SZSE:300925) Can Manage Its Debt With Ease

Warren Buffett famously said, '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. As with many other companies Shenzhen Farben Information Technology Co.,Ltd. (SZSE:300925) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Farben Information TechnologyLtd

What Is Shenzhen Farben Information TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Farben Information TechnologyLtd had debt of CN¥161.6m at the end of September 2024, a reduction from CN¥663.4m over a year. However, it does have CN¥1.10b in cash offsetting this, leading to net cash of CN¥934.3m.

A Look At Shenzhen Farben Information TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Shenzhen Farben Information TechnologyLtd had liabilities of CN¥703.8m falling due within a year, and liabilities of CN¥6.67m due beyond that. On the other hand, it had cash of CN¥1.10b and CN¥1.49b worth of receivables due within a year. So it actually has CN¥1.87b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Farben Information TechnologyLtd 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. 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.

Another good sign is that Shenzhen Farben Information TechnologyLtd has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Farben Information TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Shenzhen Farben Information TechnologyLtd recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Farben Information TechnologyLtd has CN¥934.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 25% year-on-year EBIT growth. So is Shenzhen Farben Information TechnologyLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Shenzhen Farben Information TechnologyLtd that you should be aware of before investing here.

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.