Shenzhen TVT Digital Technology (SZSE:002835) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shenzhen TVT Digital Technology Co., Ltd. (SZSE:002835) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, 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 Shenzhen TVT Digital Technology

What Is Shenzhen TVT Digital Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen TVT Digital Technology had CN¥11.0m of debt in September 2024, down from CN¥50.0m, one year before. But it also has CN¥592.0m in cash to offset that, meaning it has CN¥581.0m net cash.

How Healthy Is Shenzhen TVT Digital Technology's Balance Sheet?

The latest balance sheet data shows that Shenzhen TVT Digital Technology had liabilities of CN¥288.9m due within a year, and liabilities of CN¥4.84m falling due after that. On the other hand, it had cash of CN¥592.0m and CN¥279.2m worth of receivables due within a year. So it can boast CN¥577.4m more liquid assets than total liabilities.

This surplus suggests that Shenzhen TVT Digital Technology is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Shenzhen TVT Digital Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shenzhen TVT Digital Technology grew its EBIT by 34% 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 Shenzhen TVT Digital Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shenzhen TVT Digital Technology 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 TVT Digital Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen TVT Digital Technology has CN¥581.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in CN¥207m. When it comes to Shenzhen TVT Digital Technology's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shenzhen TVT Digital Technology , and understanding them should be part of your investment process.

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.