Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Phoenix Telecom Technology Co.,Ltd. (SZSE:301191) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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 Phoenix Telecom TechnologyLtd's Debt?
As you can see below, at the end of September 2024, Shenzhen Phoenix Telecom TechnologyLtd had CN¥20.1m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.31b in cash to offset that, meaning it has CN¥1.29b net cash.
How Strong Is Shenzhen Phoenix Telecom TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Shenzhen Phoenix Telecom TechnologyLtd had liabilities of CN¥462.9m due within a year, and liabilities of CN¥91.7m falling due after that. Offsetting these obligations, it had cash of CN¥1.31b as well as receivables valued at CN¥268.2m due within 12 months. So it actually has CN¥1.03b more liquid assets than total liabilities.
This excess liquidity suggests that Shenzhen Phoenix Telecom TechnologyLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shenzhen Phoenix Telecom TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that Shenzhen Phoenix Telecom TechnologyLtd's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Phoenix Telecom TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen Phoenix Telecom 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. Happily for any shareholders, Shenzhen Phoenix Telecom TechnologyLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While it is always sensible to investigate a company's debt, in this case Shenzhen Phoenix Telecom TechnologyLtd has CN¥1.29b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in CN¥64m. So is Shenzhen Phoenix Telecom TechnologyLtd'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 2 warning signs for Shenzhen Phoenix Telecom TechnologyLtd 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.
