Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Inovance Technology Co.,Ltd (SZSE:300124) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Shenzhen Inovance TechnologyLtd's Debt?
As you can see below, Shenzhen Inovance TechnologyLtd had CN¥4.56b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥7.97b in cash offsetting this, leading to net cash of CN¥3.41b.
How Strong Is Shenzhen Inovance TechnologyLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shenzhen Inovance TechnologyLtd had liabilities of CN¥16.2b due within 12 months and liabilities of CN¥3.81b due beyond that. On the other hand, it had cash of CN¥7.97b and CN¥11.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥409.0m.
This state of affairs indicates that Shenzhen Inovance TechnologyLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥166.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Shenzhen Inovance TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Shenzhen Inovance TechnologyLtd grew its EBIT by 16% last year, making its debt load easier to handle. 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 Inovance TechnologyLtd 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen Inovance TechnologyLtd 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. In the last three years, Shenzhen Inovance TechnologyLtd's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
We could understand if investors are concerned about Shenzhen Inovance TechnologyLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥3.41b. And it impressed us with its EBIT growth of 16% over the last year. So we don't think Shenzhen Inovance TechnologyLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Shenzhen Inovance TechnologyLtd, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
