Shenzhen Kinwong Electronic (SHSE:603228) Has A Pretty Healthy 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. We can see that Shenzhen Kinwong Electronic Co., Ltd. (SHSE:603228) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shenzhen Kinwong Electronic

What Is Shenzhen Kinwong Electronic's Net Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Kinwong Electronic had debt of CN¥1.93b at the end of September 2024, a reduction from CN¥3.59b over a year. But on the other hand it also has CN¥2.78b in cash, leading to a CN¥844.3m net cash position.

How Strong Is Shenzhen Kinwong Electronic's Balance Sheet?

According to the last reported balance sheet, Shenzhen Kinwong Electronic had liabilities of CN¥5.78b due within 12 months, and liabilities of CN¥1.73b due beyond 12 months. On the other hand, it had cash of CN¥2.78b and CN¥4.67b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Shenzhen Kinwong Electronic's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥23.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Shenzhen Kinwong Electronic also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Shenzhen Kinwong Electronic saw its EBIT drop by 2.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Kinwong Electronic's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen Kinwong Electronic 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 Kinwong Electronic reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about Shenzhen Kinwong Electronic's liabilities, but we can be reassured by the fact it has has net cash of CN¥844.3m. So we are not troubled with Shenzhen Kinwong Electronic's debt use. 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 2 warning signs for Shenzhen Kinwong Electronic 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.