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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Shenzhen Capchem Technology Co., Ltd. (SZSE:300037) makes use of debt. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Shenzhen Capchem Technology
What Is Shenzhen Capchem Technology's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Capchem Technology had debt of CN¥3.13b, up from CN¥2.76b in one year. But it also has CN¥5.30b in cash to offset that, meaning it has CN¥2.17b net cash.
How Strong Is Shenzhen Capchem Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shenzhen Capchem Technology had liabilities of CN¥4.46b due within 12 months and liabilities of CN¥2.65b due beyond that. Offsetting this, it had CN¥5.30b in cash and CN¥3.32b in receivables that were due within 12 months. So it can boast CN¥1.52b more liquid assets than total liabilities.
This surplus suggests that Shenzhen Capchem Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Capchem Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Shenzhen Capchem Technology's load is not too heavy, because its EBIT was down 40% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Capchem 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen Capchem 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. Looking at the most recent three years, Shenzhen Capchem Technology recorded free cash flow of 28% of its EBIT, which is weaker 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 Capchem Technology has CN¥2.17b in net cash and a decent-looking balance sheet. So we are not troubled with Shenzhen Capchem Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shenzhen Capchem Technology is showing 1 warning sign in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.