We Think Sharetronic Data Technology (SZSE:300857) Can Stay On Top Of Its 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. As with many other companies Sharetronic Data Technology Co., Ltd. (SZSE:300857) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Sharetronic Data Technology

How Much Debt Does Sharetronic Data Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Sharetronic Data Technology had debt of CN¥1.51b, up from CN¥695.6m in one year. However, its balance sheet shows it holds CN¥1.64b in cash, so it actually has CN¥122.3m net cash.

How Strong Is Sharetronic Data Technology's Balance Sheet?

We can see from the most recent balance sheet that Sharetronic Data Technology had liabilities of CN¥3.19b falling due within a year, and liabilities of CN¥268.4m due beyond that. On the other hand, it had cash of CN¥1.64b and CN¥1.55b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥274.1m.

Having regard to Sharetronic Data Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥28.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Sharetronic Data Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Sharetronic Data Technology grew its EBIT by 233% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sharetronic Data Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sharetronic Data Technology 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. During the last three years, Sharetronic Data Technology burned a lot of cash. 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 look at a company's total liabilities, it is very reassuring that Sharetronic Data Technology has CN¥122.3m in net cash. And we liked the look of last year's 233% year-on-year EBIT growth. So we are not troubled with Sharetronic Data Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Sharetronic Data Technology that you should be aware of.

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.

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.