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. We can see that SanFeng Intelligent Equipment Group Co., Ltd. (SZSE:300276) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is SanFeng Intelligent Equipment Group's Net Debt?
As you can see below, SanFeng Intelligent Equipment Group had CN¥184.9m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥400.0m in cash, so it actually has CN¥215.1m net cash.
How Strong Is SanFeng Intelligent Equipment Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SanFeng Intelligent Equipment Group had liabilities of CN¥2.70b due within 12 months and liabilities of CN¥63.8m due beyond that. Offsetting these obligations, it had cash of CN¥400.0m as well as receivables valued at CN¥814.2m due within 12 months. So its liabilities total CN¥1.55b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because SanFeng Intelligent Equipment Group is worth CN¥5.60b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, SanFeng Intelligent Equipment Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SanFeng Intelligent Equipment Group 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 SanFeng Intelligent Equipment Group wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥1.6b. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is SanFeng Intelligent Equipment Group?
While SanFeng Intelligent Equipment Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥177m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that SanFeng Intelligent Equipment Group is showing 1 warning sign in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.