These 4 Measures Indicate That Shenzhen Neptunus Interlong Bio-technique (HKG:8329) Is Using Debt Safely

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. As with many other companies Shenzhen Neptunus Interlong Bio-technique Company Limited (HKG:8329) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Neptunus Interlong Bio-technique

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

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Shenzhen Neptunus Interlong Bio-technique had CN¥88.4m of debt, an increase on CN¥66.1m, over one year. But it also has CN¥317.4m in cash to offset that, meaning it has CN¥229.1m net cash.

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

Zooming in on the latest balance sheet data, we can see that Shenzhen Neptunus Interlong Bio-technique had liabilities of CN¥362.0m due within 12 months and liabilities of CN¥31.6m due beyond that. Offsetting this, it had CN¥317.4m in cash and CN¥315.5m in receivables that were due within 12 months. So it actually has CN¥239.4m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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.

Better yet, Shenzhen Neptunus Interlong Bio-technique grew its EBIT by 135% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 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. 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. During the last three years, Shenzhen Neptunus Interlong Bio-technique burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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¥229.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 135% year-on-year EBIT growth. So is Shenzhen Neptunus Interlong Bio-technique's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for Shenzhen Neptunus Interlong Bio-technique (of which 1 doesn't sit too well with us!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.