Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Shenzhen SEG Co.,Ltd (SZSE:000058) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen SEGLtd's Debt?

As you can see below, Shenzhen SEGLtd had CN¥643.8m of debt at September 2024, down from CN¥808.3m a year prior. But on the other hand it also has CN¥954.4m in cash, leading to a CN¥310.7m net cash position.

A Look At Shenzhen SEGLtd's Liabilities

The latest balance sheet data shows that Shenzhen SEGLtd had liabilities of CN¥1.87b due within a year, and liabilities of CN¥710.3m falling due after that. Offsetting these obligations, it had cash of CN¥954.4m as well as receivables valued at CN¥466.7m due within 12 months. So its liabilities total CN¥1.16b more than the combination of its cash and short-term receivables.

Of course, Shenzhen SEGLtd has a market capitalization of CN¥10.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Shenzhen SEGLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shenzhen SEGLtd's load is not too heavy, because its EBIT was down 84% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen SEGLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen SEGLtd 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. Over the last three years, Shenzhen SEGLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Shenzhen SEGLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥310.7m. The cherry on top was that in converted 352% of that EBIT to free cash flow, bringing in CN¥299m. So we are not troubled with Shenzhen SEGLtd's debt use. 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. Case in point: We've spotted 1 warning sign for Shenzhen SEGLtd you should be aware of.

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.