Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Shenzhen Lifotronic Technology Co., Ltd. (SHSE:688389) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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.
How Much Debt Does Shenzhen Lifotronic Technology Carry?
As you can see below, at the end of March 2024, Shenzhen Lifotronic Technology had CN¥213.0m of debt, up from CN¥132.0m a year ago. Click the image for more detail. However, it does have CN¥1.30b in cash offsetting this, leading to net cash of CN¥1.08b.
![big](https://usnewsfile.moomoo.com/public/MM-PersistNewsContentImage/7781/20240726/0-4aa519e09de0958b3db5eb10c338b1f6-0-22bcd495d94276b1f6f104d04c6acb65.png/big)
A Look At Shenzhen Lifotronic Technology's Liabilities
We can see from the most recent balance sheet that Shenzhen Lifotronic Technology had liabilities of CN¥438.8m falling due within a year, and liabilities of CN¥5.39m due beyond that. Offsetting this, it had CN¥1.30b in cash and CN¥200.3m in receivables that were due within 12 months. So it can boast CN¥1.05b more liquid assets than total liabilities.
This surplus suggests that Shenzhen Lifotronic Technology is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Shenzhen Lifotronic Technology 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 Lifotronic Technology has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Lifotronic Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shenzhen Lifotronic 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 most recent three years, Shenzhen Lifotronic Technology recorded free cash flow worth 57% 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 it is always sensible to investigate a company's debt, in this case Shenzhen Lifotronic Technology has CN¥1.08b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 45% over the last year. So is Shenzhen Lifotronic Technology's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenzhen Lifotronic Technology you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com