Shenzhen Topband (SZSE:002139) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Shenzhen Topband Co., Ltd. (SZSE:002139) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shenzhen Topband

What Is Shenzhen Topband's Debt?

As you can see below, Shenzhen Topband had CN¥1.26b of debt at September 2024, down from CN¥1.34b a year prior. However, its balance sheet shows it holds CN¥2.33b in cash, so it actually has CN¥1.06b net cash.

How Strong Is Shenzhen Topband's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Topband had liabilities of CN¥5.27b due within 12 months and liabilities of CN¥439.0m due beyond that. On the other hand, it had cash of CN¥2.33b and CN¥3.03b worth of receivables due within a year. So it has liabilities totalling CN¥352.1m more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen Topband shares are worth a total of CN¥17.3b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shenzhen Topband also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Shenzhen Topband grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Topband'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 Topband 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 Topband recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Shenzhen Topband's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.06b. And it impressed us with its EBIT growth of 61% over the last year. So we don't think Shenzhen Topband's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shenzhen Topband's earnings per share history for free.

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.