We Think Shenzhen Fluence Technology (SZSE:300647) Has A Fair Chunk Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shenzhen Fluence Technology PLC. (SZSE:300647) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shenzhen Fluence Technology

What Is Shenzhen Fluence Technology's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Fluence Technology had debt of CN¥920.5m at the end of June 2024, a reduction from CN¥965.5m over a year. However, it does have CN¥156.9m in cash offsetting this, leading to net debt of about CN¥763.7m.

A Look At Shenzhen Fluence Technology's Liabilities

The latest balance sheet data shows that Shenzhen Fluence Technology had liabilities of CN¥1.13b due within a year, and liabilities of CN¥198.0m falling due after that. Offsetting this, it had CN¥156.9m in cash and CN¥461.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥714.4m more than its cash and near-term receivables, combined.

Of course, Shenzhen Fluence Technology has a market capitalization of CN¥3.68b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Fluence Technology will need earnings to service that debt. 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 Fluence Technology had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥616m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shenzhen Fluence Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥241m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥232m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Shenzhen Fluence Technology is showing 3 warning signs in our investment analysis , you should know about...

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.

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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.