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. We note that Shenzhen Techwinsemi Technology Co., Ltd. (SZSE:001309) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
See our latest analysis for Shenzhen Techwinsemi Technology
What Is Shenzhen Techwinsemi Technology's Net Debt?
As you can see below, at the end of September 2023, Shenzhen Techwinsemi Technology had CN¥1.48b of debt, up from CN¥438.2m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥246.5m, its net debt is less, at about CN¥1.24b.
![debt-equity-history-analysis](https://usnewsfile.moomoo.com/public/MM-PersistNewsContentImage/7781/20240124/0-bdea2ae6777206f018af4d7659faba6a-0-cdc4b4714955695f6673121df3651f5c.png/big)
How Strong Is Shenzhen Techwinsemi Technology's Balance Sheet?
According to the last reported balance sheet, Shenzhen Techwinsemi Technology had liabilities of CN¥1.72b due within 12 months, and liabilities of CN¥217.0m due beyond 12 months. Offsetting this, it had CN¥246.5m in cash and CN¥393.0m in receivables that were due within 12 months. So its liabilities total CN¥1.30b more than the combination of its cash and short-term receivables.
Since publicly traded Shenzhen Techwinsemi Technology shares are worth a total of CN¥7.87b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Techwinsemi Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Shenzhen Techwinsemi Technology reported revenue of CN¥1.3b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Shenzhen Techwinsemi Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥125m at the EBIT level. 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. However, it doesn't help that it burned through CN¥1.1b of cash over the last year. So in short it's a really risky stock. 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. We've identified 2 warning signs with Shenzhen Techwinsemi Technology (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.