Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shenzhen Goodix Technology Co., Ltd. (SHSE:603160) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenzhen Goodix Technology's Debt?

As you can see below, Shenzhen Goodix Technology had CN¥449.7m of debt at September 2024, down from CN¥543.8m a year prior. However, it does have CN¥4.36b in cash offsetting this, leading to net cash of CN¥3.91b.

A Look At Shenzhen Goodix Technology's Liabilities

We can see from the most recent balance sheet that Shenzhen Goodix Technology had liabilities of CN¥1.13b falling due within a year, and liabilities of CN¥330.9m due beyond that. On the other hand, it had cash of CN¥4.36b and CN¥542.4m worth of receivables due within a year. So it actually has CN¥3.44b more liquid assets than total liabilities.

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

Although Shenzhen Goodix Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥145m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Goodix 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 Goodix 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. Happily for any shareholders, Shenzhen Goodix Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Goodix Technology has net cash of CN¥3.91b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥730m, being 504% of its EBIT. So is Shenzhen Goodix 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. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Goodix Technology .

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.