Guangdong Shenglu Telecommunication Tech (SZSE:002446) 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.' 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. We can see that Guangdong Shenglu Telecommunication Tech. Co., Ltd. (SZSE:002446) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Guangdong Shenglu Telecommunication Tech

What Is Guangdong Shenglu Telecommunication Tech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guangdong Shenglu Telecommunication Tech had CN¥293.6m of debt, an increase on CN¥195.7m, over one year. However, it does have CN¥869.2m in cash offsetting this, leading to net cash of CN¥575.6m.

How Healthy Is Guangdong Shenglu Telecommunication Tech's Balance Sheet?

The latest balance sheet data shows that Guangdong Shenglu Telecommunication Tech had liabilities of CN¥812.7m due within a year, and liabilities of CN¥226.2m falling due after that. Offsetting this, it had CN¥869.2m in cash and CN¥999.7m in receivables that were due within 12 months. So it can boast CN¥830.0m more liquid assets than total liabilities.

It's good to see that Guangdong Shenglu Telecommunication Tech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Guangdong Shenglu Telecommunication Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Guangdong Shenglu Telecommunication Tech's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guangdong Shenglu Telecommunication Tech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Guangdong Shenglu Telecommunication Tech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Guangdong Shenglu Telecommunication Tech saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Shenglu Telecommunication Tech has CN¥575.6m in net cash and a decent-looking balance sheet. So we are not troubled with Guangdong Shenglu Telecommunication Tech's debt use. 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. For example - Guangdong Shenglu Telecommunication Tech has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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