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 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. Importantly, Shenzhen Envicool Technology Co., Ltd. (SZSE:002837) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Shenzhen Envicool Technology Carry?

The chart below, which you can click on for greater detail, shows that Shenzhen Envicool Technology had CN¥620.9m in debt in June 2024; about the same as the year before. But on the other hand it also has CN¥659.6m in cash, leading to a CN¥38.7m net cash position.

How Healthy Is Shenzhen Envicool Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Envicool Technology had liabilities of CN¥2.11b due within 12 months and liabilities of CN¥202.5m due beyond that. Offsetting this, it had CN¥659.6m in cash and CN¥2.35b in receivables that were due within 12 months. So it can boast CN¥696.3m more liquid assets than total liabilities.

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

On top of that, Shenzhen Envicool Technology grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. 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 Envicool Technology 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, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen Envicool Technology 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 Envicool Technology's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Envicool Technology has CN¥38.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 53% year-on-year EBIT growth. So is Shenzhen Envicool Technology's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shenzhen Envicool Technology's earnings per share history for free.

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.