Is Shenzhen Neptunus Interlong Bio-technique (HKG:8329) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Shenzhen Neptunus Interlong Bio-technique Company Limited (HKG:8329) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Shenzhen Neptunus Interlong Bio-technique

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

The chart below, which you can click on for greater detail, shows that Shenzhen Neptunus Interlong Bio-technique had CN¥89.4m in debt in June 2024; about the same as the year before. But it also has CN¥391.9m in cash to offset that, meaning it has CN¥302.5m net cash.

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

The latest balance sheet data shows that Shenzhen Neptunus Interlong Bio-technique had liabilities of CN¥330.8m due within a year, and liabilities of CN¥36.8m falling due after that. On the other hand, it had cash of CN¥391.9m and CN¥301.0m worth of receivables due within a year. So it can boast CN¥325.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Shenzhen Neptunus Interlong Bio-technique's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Shenzhen Neptunus Interlong Bio-technique has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shenzhen Neptunus Interlong Bio-technique's load is not too heavy, because its EBIT was down 37% 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 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. Looking at the most recent three years, Shenzhen Neptunus Interlong Bio-technique recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Shenzhen Neptunus Interlong Bio-technique has net cash of CN¥302.5m and plenty of liquid assets. So we don't have any problem with Shenzhen Neptunus Interlong Bio-technique's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Shenzhen Neptunus Interlong Bio-technique (1 is potentially serious) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.