Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shenzhen Urban Transport Planning Center Co., Ltd. (SZSE:301091) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shenzhen Urban Transport Planning Center's Debt?

As you can see below, Shenzhen Urban Transport Planning Center had CN¥49.3m of debt at March 2024, down from CN¥70.9m a year prior. However, it does have CN¥987.2m in cash offsetting this, leading to net cash of CN¥937.9m.

How Strong Is Shenzhen Urban Transport Planning Center's Balance Sheet?

According to the last reported balance sheet, Shenzhen Urban Transport Planning Center had liabilities of CN¥708.3m due within 12 months, and liabilities of CN¥93.8m due beyond 12 months. Offsetting this, it had CN¥987.2m in cash and CN¥1.14b in receivables that were due within 12 months. So it can boast CN¥1.33b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Urban Transport Planning Center has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Urban Transport Planning Center boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Shenzhen Urban Transport Planning Center grew its EBIT by 182% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Urban Transport Planning Center's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhen Urban Transport Planning Center 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, Shenzhen Urban Transport Planning Center saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Urban Transport Planning Center has net cash of CN¥937.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 182% year-on-year EBIT growth. So we are not troubled with Shenzhen Urban Transport Planning Center'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. For example, we've discovered 1 warning sign for Shenzhen Urban Transport Planning Center that you should be aware of before investing here.

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.