Shenzhen Edadoc TechnologyLtd (SZSE:301366) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Shenzhen Edadoc Technology Co.,Ltd. (SZSE:301366) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shenzhen Edadoc TechnologyLtd

What Is Shenzhen Edadoc TechnologyLtd's Net Debt?

As you can see below, at the end of March 2024, Shenzhen Edadoc TechnologyLtd had CN¥67.1m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥1.21b in cash offsetting this, leading to net cash of CN¥1.14b.

How Healthy Is Shenzhen Edadoc TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Edadoc TechnologyLtd had liabilities of CN¥347.3m falling due within a year, and liabilities of CN¥12.1m due beyond that. Offsetting this, it had CN¥1.21b in cash and CN¥176.8m in receivables that were due within 12 months. So it actually has CN¥1.03b more liquid assets than total liabilities.

It's good to see that Shenzhen Edadoc TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Shenzhen Edadoc TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shenzhen Edadoc TechnologyLtd's load is not too heavy, because its EBIT was down 54% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Edadoc TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen Edadoc 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. During the last three years, Shenzhen Edadoc TechnologyLtd 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 investigate a company's debt, in this case Shenzhen Edadoc TechnologyLtd has CN¥1.14b in net cash and a decent-looking balance sheet. So we are not troubled with Shenzhen Edadoc TechnologyLtd'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 example, we've discovered 4 warning signs for Shenzhen Edadoc TechnologyLtd (2 don't sit too well with us!) that you should be aware of before investing here.

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.

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