Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Shenzhen Baoming Technology Co.,Ltd. (SZSE:002992) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Baoming TechnologyLtd

How Much Debt Does Shenzhen Baoming TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shenzhen Baoming TechnologyLtd had CN¥654.9m of debt, an increase on CN¥308.5m, over one year. However, because it has a cash reserve of CN¥336.9m, its net debt is less, at about CN¥318.0m.

A Look At Shenzhen Baoming TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenzhen Baoming TechnologyLtd had liabilities of CN¥1.46b due within 12 months and liabilities of CN¥269.5m due beyond that. Offsetting this, it had CN¥336.9m in cash and CN¥711.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥681.9m more than its cash and near-term receivables, combined.

Of course, Shenzhen Baoming TechnologyLtd has a market capitalization of CN¥9.65b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Baoming TechnologyLtd 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.

Over 12 months, Shenzhen Baoming TechnologyLtd reported revenue of CN¥1.2b, which is a gain of 25%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Shenzhen Baoming TechnologyLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥129m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥233m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs for Shenzhen Baoming TechnologyLtd (of which 1 can't be ignored!) you should know about.

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.