The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shenzhen Urban Transport Planning Center Co., Ltd. (SZSE:301091) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shenzhen Urban Transport Planning Center's Net Debt?

As you can see below, Shenzhen Urban Transport Planning Center had CN¥49.3m of debt at March 2024, down from CN¥70.9m a year prior. But it also has CN¥987.2m in cash to offset that, meaning it has CN¥937.9m net cash.

How Strong Is Shenzhen Urban Transport Planning Center's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Urban Transport Planning Center had liabilities of CN¥708.3m falling due within a year, and liabilities of CN¥93.8m due beyond that. Offsetting these obligations, it had cash of CN¥987.2m as well as receivables valued at CN¥1.14b due within 12 months. So it actually has CN¥1.33b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Urban Transport Planning Center has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Urban Transport Planning Center boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shenzhen Urban Transport Planning Center has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Urban Transport Planning Center can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen Urban Transport Planning Center 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 Urban Transport Planning Center 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 Urban Transport Planning Center has net cash of CN¥937.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 45% over the last year. So we don't have any problem with Shenzhen Urban Transport Planning Center's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Shenzhen Urban Transport Planning Center (1 is significant!) that you should be aware of before investing here.

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.