Here's Why Shenzhen Bsc TechnologyLtd (SZSE:300951) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Shenzhen Bsc Technology Co.,Ltd. (SZSE:300951) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shenzhen Bsc TechnologyLtd

How Much Debt Does Shenzhen Bsc TechnologyLtd Carry?

As you can see below, at the end of March 2024, Shenzhen Bsc TechnologyLtd had CN¥80.1m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥1.64b in cash offsetting this, leading to net cash of CN¥1.56b.

A Look At Shenzhen Bsc TechnologyLtd's Liabilities

According to the last reported balance sheet, Shenzhen Bsc TechnologyLtd had liabilities of CN¥605.0m due within 12 months, and liabilities of CN¥82.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.64b as well as receivables valued at CN¥681.0m due within 12 months. So it actually has CN¥1.63b more liquid assets than total liabilities.

This excess liquidity is a great indication that Shenzhen Bsc TechnologyLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Shenzhen Bsc TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shenzhen Bsc TechnologyLtd if management cannot prevent a repeat of the 30% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Bsc TechnologyLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shenzhen Bsc TechnologyLtd 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 most recent three years, Shenzhen Bsc TechnologyLtd recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Bsc TechnologyLtd has CN¥1.56b in net cash and a decent-looking balance sheet. So we are not troubled with Shenzhen Bsc TechnologyLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shenzhen Bsc TechnologyLtd (of which 1 is potentially serious!) you should know about.

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.

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