We Think Shenzhen Neptunus Interlong Bio-technique (HKG:8329) Can Stay On Top Of Its 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.' 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. We note that Shenzhen Neptunus Interlong Bio-technique Company Limited (HKG:8329) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Shenzhen Neptunus Interlong Bio-technique had CN¥66.1m of debt, an increase on CN¥40.0m, over one year. However, its balance sheet shows it holds CN¥328.9m in cash, so it actually has CN¥262.8m net cash.

How Healthy 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¥339.3m due within 12 months, and liabilities of CN¥30.6m due beyond 12 months. Offsetting this, it had CN¥328.9m in cash and CN¥229.6m in receivables that were due within 12 months. So it actually has CN¥188.6m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Shenzhen Neptunus Interlong Bio-technique boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Shenzhen Neptunus Interlong Bio-technique has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Shenzhen Neptunus Interlong Bio-technique recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥262.8m, as well as more liquid assets than liabilities. So we don't think Shenzhen Neptunus Interlong Bio-technique's use of debt is risky. 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 Shenzhen Neptunus Interlong Bio-technique has 3 warning signs (and 1 which is significant) we think you should know about.

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.