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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Cetc Potevio Science&Technology Co.,Ltd. (SZSE:002544) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Cetc Potevio Science&TechnologyLtd's Net Debt?
The image below, which you can click on for greater detail, shows that Cetc Potevio Science&TechnologyLtd had debt of CN¥574.7m at the end of March 2024, a reduction from CN¥939.3m over a year. But it also has CN¥1.97b in cash to offset that, meaning it has CN¥1.40b net cash.
How Strong Is Cetc Potevio Science&TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Cetc Potevio Science&TechnologyLtd had liabilities of CN¥6.03b due within a year, and liabilities of CN¥77.6m falling due after that. Offsetting this, it had CN¥1.97b in cash and CN¥5.04b in receivables that were due within 12 months. So it can boast CN¥905.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Cetc Potevio Science&TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Cetc Potevio Science&TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cetc Potevio Science&TechnologyLtd's ability to maintain a healthy balance sheet going forward. 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, Cetc Potevio Science&TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥5.3b, which is a fall of 25%. That makes us nervous, to say the least.
So How Risky Is Cetc Potevio Science&TechnologyLtd?
While Cetc Potevio Science&TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥30m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should be aware of the 3 warning signs we've spotted with Cetc Potevio Science&TechnologyLtd .
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.