Shenzhen Longtech Smart Control (SZSE:300916) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Longtech Smart Control Co., Ltd. (SZSE:300916) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shenzhen Longtech Smart Control

What Is Shenzhen Longtech Smart Control's Net Debt?

As you can see below, at the end of March 2024, Shenzhen Longtech Smart Control had CN¥140.1m of debt, up from CN¥60.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.09b in cash, leading to a CN¥949.3m net cash position.

How Strong Is Shenzhen Longtech Smart Control's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Longtech Smart Control had liabilities of CN¥591.1m falling due within a year, and liabilities of CN¥17.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.09b as well as receivables valued at CN¥453.9m due within 12 months. So it can boast CN¥934.5m more liquid assets than total liabilities.

This excess liquidity suggests that Shenzhen Longtech Smart Control is taking a careful approach to debt. 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 Longtech Smart Control has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shenzhen Longtech Smart Control's load is not too heavy, because its EBIT was down 23% over the last year. 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 you can't view debt in total isolation; since Shenzhen Longtech Smart Control 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen Longtech Smart Control 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, Shenzhen Longtech Smart Control 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 Longtech Smart Control has CN¥949.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥227m, being 107% of its EBIT. So we don't think Shenzhen Longtech Smart Control's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Shenzhen Longtech Smart Control (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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