Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Kunshan Kersen Science & Technology Co.,Ltd. (SHSE:603626) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 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, 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.
View our latest analysis for Kunshan Kersen Science & TechnologyLtd
What Is Kunshan Kersen Science & TechnologyLtd's Debt?
As you can see below, at the end of September 2023, Kunshan Kersen Science & TechnologyLtd had CN¥1.33b of debt, up from CN¥1.26b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥373.3m, its net debt is less, at about CN¥956.4m.
How Strong Is Kunshan Kersen Science & TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Kunshan Kersen Science & TechnologyLtd had liabilities of CN¥1.51b due within a year, and liabilities of CN¥902.1m falling due after that. Offsetting this, it had CN¥373.3m in cash and CN¥1.29b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥752.6m.
Given Kunshan Kersen Science & TechnologyLtd has a market capitalization of CN¥4.49b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kunshan Kersen Science & TechnologyLtd 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.
Over 12 months, Kunshan Kersen Science & TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.8b, which is a fall of 28%. That makes us nervous, to say the least.
Caveat Emptor
Not only did Kunshan Kersen Science & TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥126m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥111m. So to be blunt we do think it is risky. 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. For instance, we've identified 1 warning sign for Kunshan Kersen Science & TechnologyLtd that you should be aware of.
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.
