Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Longshine Technology Group Co., Ltd. (SZSE:300682) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Longshine Technology Group Carry?
You can click the graphic below for the historical numbers, but it shows that Longshine Technology Group had CN¥531.5m of debt in March 2024, down from CN¥914.9m, one year before. However, it does have CN¥1.45b in cash offsetting this, leading to net cash of CN¥914.9m.
A Look At Longshine Technology Group's Liabilities
According to the last reported balance sheet, Longshine Technology Group had liabilities of CN¥1.66b due within 12 months, and liabilities of CN¥570.4m due beyond 12 months. Offsetting this, it had CN¥1.45b in cash and CN¥3.78b in receivables that were due within 12 months. So it can boast CN¥2.99b more liquid assets than total liabilities.
This surplus suggests that Longshine Technology Group is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Longshine Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Longshine Technology Group has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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. While Longshine Technology Group 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. Looking at the most recent three years, Longshine Technology Group recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Longshine Technology Group has net cash of CN¥914.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 37% over the last year. So is Longshine Technology Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Longshine Technology Group 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.