Does Shenzhen Neptunus Interlong Bio-technique (HKG:8329) Have A Healthy Balance Sheet?

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. As with many other companies Shenzhen Neptunus Interlong Bio-technique Company Limited (HKG:8329) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenzhen Neptunus Interlong Bio-technique

What Is Shenzhen Neptunus Interlong Bio-technique's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Shenzhen Neptunus Interlong Bio-technique had debt of CN¥105.7m, up from CN¥10.1m in one year. But it also has CN¥311.1m in cash to offset that, meaning it has CN¥205.5m net cash.

How Healthy Is Shenzhen Neptunus Interlong Bio-technique's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Neptunus Interlong Bio-technique had liabilities of CN¥335.5m falling due within a year, and liabilities of CN¥27.7m due beyond that. Offsetting this, it had CN¥311.1m in cash and CN¥231.3m in receivables that were due within 12 months. So it actually has CN¥179.3m more liquid assets than total liabilities.

This luscious liquidity implies that Shenzhen Neptunus Interlong Bio-technique's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Shenzhen Neptunus Interlong Bio-technique boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shenzhen Neptunus Interlong Bio-technique's saving grace is its low debt levels, because its EBIT has tanked 52% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Neptunus Interlong Bio-technique's earnings that will influence how the balance sheet holds up in the future. 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. While Shenzhen Neptunus Interlong Bio-technique has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Shenzhen Neptunus Interlong Bio-technique actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case Shenzhen Neptunus Interlong Bio-technique has CN¥205.5m in net cash and a decent-looking balance sheet. So we don't have any problem with Shenzhen Neptunus Interlong Bio-technique's use of debt. 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. For instance, we've identified 3 warning signs for Shenzhen Neptunus Interlong Bio-technique (1 is potentially serious) you should be aware of.

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.