David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Longshine Technology Group Co., Ltd. (SZSE:300682) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Longshine Technology Group

How Much Debt Does Longshine Technology Group Carry?

As you can see below, at the end of March 2022, Longshine Technology Group had CN¥818.9m of debt, up from CN¥720.1m a year ago. Click the image for more detail. However, it does have CN¥1.55b in cash offsetting this, leading to net cash of CN¥727.7m.

How Strong Is Longshine Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Longshine Technology Group had liabilities of CN¥1.38b due within 12 months and liabilities of CN¥738.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.55b as well as receivables valued at CN¥3.81b due within 12 months. So it actually has CN¥3.24b more liquid assets than total liabilities.

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

Also good is that Longshine Technology Group grew its EBIT at 14% over the last year, further increasing its ability to manage 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 Longshine Technology Group 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. Longshine Technology Group 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 last three years, Longshine Technology Group reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Longshine Technology Group has CN¥727.7m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't have any problem with Longshine Technology Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Longshine Technology Group has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.