Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shenzhen Goodix Technology Co., Ltd. (SHSE:603160) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shenzhen Goodix Technology's Debt?

As you can see below, Shenzhen Goodix Technology had CN¥570.8m of debt at March 2024, down from CN¥778.3m a year prior. However, it does have CN¥4.33b in cash offsetting this, leading to net cash of CN¥3.76b.

How Strong Is Shenzhen Goodix Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Goodix Technology had liabilities of CN¥1.31b due within 12 months and liabilities of CN¥350.0m due beyond that. Offsetting this, it had CN¥4.33b in cash and CN¥685.7m in receivables that were due within 12 months. So it actually has CN¥3.36b more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Goodix Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Goodix Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Shenzhen Goodix Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥177m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Goodix Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shenzhen Goodix Technology 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 last year, Shenzhen Goodix Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Goodix Technology has CN¥3.76b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.6b, being 885% of its EBIT. So we don't think Shenzhen Goodix Technology's use of debt is risky. 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. For example, we've discovered 1 warning sign for Shenzhen Goodix Technology that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.