Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Shenzhen Kingsino Technology Co.,Ltd. (SZSE:002548) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shenzhen Kingsino TechnologyLtd

What Is Shenzhen Kingsino TechnologyLtd's Net Debt?

As you can see below, at the end of September 2023, Shenzhen Kingsino TechnologyLtd had CN¥2.93b of debt, up from CN¥2.04b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥810.9m, its net debt is less, at about CN¥2.12b.

How Healthy Is Shenzhen Kingsino TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Kingsino TechnologyLtd had liabilities of CN¥3.21b falling due within a year, and liabilities of CN¥1.32b due beyond that. Offsetting this, it had CN¥810.9m in cash and CN¥359.1m in receivables that were due within 12 months. So its liabilities total CN¥3.36b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥4.72b, so it does suggest shareholders should keep an eye on Shenzhen Kingsino TechnologyLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Kingsino TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. 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 Kingsino TechnologyLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Shenzhen Kingsino TechnologyLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥147m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥274m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shenzhen Kingsino TechnologyLtd (of which 2 don't sit too well with us!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.