Is Shenzhen Genvict Technologies (SZSE:002869) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Shenzhen Genvict Technologies Co., Ltd. (SZSE:002869) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shenzhen Genvict Technologies

How Much Debt Does Shenzhen Genvict Technologies Carry?

As you can see below, Shenzhen Genvict Technologies had CN¥89.8m of debt at March 2024, down from CN¥99.7m a year prior. However, it does have CN¥1.42b in cash offsetting this, leading to net cash of CN¥1.33b.

How Healthy Is Shenzhen Genvict Technologies' Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Genvict Technologies had liabilities of CN¥433.3m falling due within a year, and liabilities of CN¥89.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.42b as well as receivables valued at CN¥418.9m due within 12 months. So it can boast CN¥1.32b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Genvict Technologies is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shenzhen Genvict Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Genvict Technologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shenzhen Genvict Technologies's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Shenzhen Genvict Technologies?

Although Shenzhen Genvict Technologies had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥62m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that Shenzhen Genvict Technologies is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...

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.

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