Shenzhen Neptunus Interlong Bio-technique (HKG:8329) Has A Rock Solid Balance Sheet
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Neptunus Interlong Bio-technique Company Limited (HKG:8329) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Shenzhen Neptunus Interlong Bio-technique
What Is Shenzhen Neptunus Interlong Bio-technique's Debt?
The chart below shows that Shenzhen Neptunus Interlong Bio-technique had debt of CN¥39.0m at the end of the period to June 2019. However, it does have CN¥319.2m in cash offsetting this, leading to net cash of CN¥280.2m.
A Look At Shenzhen Neptunus Interlong Bio-technique's Liabilities
We can see from the most recent balance sheet that Shenzhen Neptunus Interlong Bio-technique had liabilities of CN¥194.4m falling due within a year, and liabilities of CN¥22.0m due beyond that. Offsetting these obligations, it had cash of CN¥319.2m as well as receivables valued at CN¥211.2m due within 12 months. So it can boast CN¥314.0m more liquid assets than total liabilities.
This surplus liquidity suggests that Shenzhen Neptunus Interlong Bio-technique's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Shenzhen Neptunus Interlong Bio-technique has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Shenzhen Neptunus Interlong Bio-technique grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Neptunus Interlong Bio-technique will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shenzhen Neptunus Interlong Bio-technique 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. In the last three years, Shenzhen Neptunus Interlong Bio-technique created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing up
While it is always sensible to investigate a company's debt, in this case Shenzhen Neptunus Interlong Bio-technique has CN¥280.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 32% year-on-year EBIT growth. So we don't think Shenzhen Neptunus Interlong Bio-technique's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shenzhen Neptunus Interlong Bio-technique's earnings per share history for free.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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