Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Longli Technology Co.,Ltd (SZSE:300752) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Shenzhen Longli TechnologyLtd
What Is Shenzhen Longli TechnologyLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that Shenzhen Longli TechnologyLtd had CN¥117.1m of debt in September 2023, down from CN¥180.2m, one year before. However, it does have CN¥442.2m in cash offsetting this, leading to net cash of CN¥325.1m.
How Healthy Is Shenzhen Longli TechnologyLtd's Balance Sheet?
We can see from the most recent balance sheet that Shenzhen Longli TechnologyLtd had liabilities of CN¥620.2m falling due within a year, and liabilities of CN¥102.6m due beyond that. On the other hand, it had cash of CN¥442.2m and CN¥616.0m worth of receivables due within a year. So it actually has CN¥335.5m more liquid assets than total liabilities.
This surplus suggests that Shenzhen Longli TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Longli TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Longli TechnologyLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Shenzhen Longli TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥954m. To be frank that doesn't bode well.
So How Risky Is Shenzhen Longli TechnologyLtd?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Shenzhen Longli TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥144m and booked a CN¥281m accounting loss. With only CN¥325.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for Shenzhen Longli TechnologyLtd (of which 1 is significant!) you should know about.
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.
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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.
