Shenzhen Gongjin Electronics (SHSE:603118) Has A Somewhat Strained Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Shenzhen Gongjin Electronics Co., Ltd. (SHSE:603118) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenzhen Gongjin Electronics

What Is Shenzhen Gongjin Electronics's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Gongjin Electronics had debt of CN¥1.48b at the end of March 2024, a reduction from CN¥1.94b over a year. But on the other hand it also has CN¥1.99b in cash, leading to a CN¥516.2m net cash position.

How Strong Is Shenzhen Gongjin Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Gongjin Electronics had liabilities of CN¥4.22b due within 12 months and liabilities of CN¥364.9m due beyond that. On the other hand, it had cash of CN¥1.99b and CN¥2.10b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥493.8m.

Since publicly traded Shenzhen Gongjin Electronics shares are worth a total of CN¥6.26b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shenzhen Gongjin Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Shenzhen Gongjin Electronics's load is not too heavy, because its EBIT was down 64% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Gongjin Electronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen Gongjin Electronics 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 Gongjin Electronics barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

We could understand if investors are concerned about Shenzhen Gongjin Electronics's liabilities, but we can be reassured by the fact it has has net cash of CN¥516.2m. So while Shenzhen Gongjin Electronics does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenzhen Gongjin Electronics you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.