Shenzhen Neptunus Interlong Bio-technique (HKG:8329) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shenzhen Neptunus Interlong Bio-technique Company Limited (HKG:8329) does carry 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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shenzhen Neptunus Interlong Bio-technique

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

You can click the graphic below for the historical numbers, but it shows that Shenzhen Neptunus Interlong Bio-technique had CN¥35.0m of debt in June 2020, down from CN¥39.0m, one year before. But on the other hand it also has CN¥436.6m in cash, leading to a CN¥401.6m net cash position.

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

According to the last reported balance sheet, Shenzhen Neptunus Interlong Bio-technique had liabilities of CN¥195.1m due within 12 months, and liabilities of CN¥13.4m due beyond 12 months. On the other hand, it had cash of CN¥436.6m and CN¥191.8m worth of receivables due within a year. So it can boast CN¥419.9m 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 basis we think its balance sheet is strong like a sleek panther or even a proud lion. 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.

Fortunately, Shenzhen Neptunus Interlong Bio-technique grew its EBIT by 7.9% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Neptunus Interlong Bio-technique 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 Neptunus Interlong Bio-technique 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 Neptunus Interlong Bio-technique produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Neptunus Interlong Bio-technique has net cash of CN¥401.6m, as well as more liquid assets than liabilities. So we don't think Shenzhen Neptunus Interlong Bio-technique's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen Neptunus Interlong Bio-technique , and understanding them should be part of your investment process.

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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