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. As with many other companies Visionox Technology Inc. (SZSE:002387) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Visionox Technology
What Is Visionox Technology's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Visionox Technology had debt of CN¥10.7b, up from CN¥8.60b in one year. However, it does have CN¥5.09b in cash offsetting this, leading to net debt of about CN¥5.57b.
How Strong Is Visionox Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Visionox Technology had liabilities of CN¥18.6b due within 12 months and liabilities of CN¥7.28b due beyond that. Offsetting these obligations, it had cash of CN¥5.09b as well as receivables valued at CN¥3.35b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥17.4b.
Given this deficit is actually higher than the company's market capitalization of CN¥13.0b, we think shareholders really should watch Visionox Technology's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Visionox Technology 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, Visionox Technology saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Over the last twelve months Visionox Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥3.5b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥2.7b. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Visionox Technology (including 1 which is significant) .
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.
