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. As with many other companies Shanghai Awinic Technology Co.,Ltd. (SHSE:688798) makes use of debt. But the more important question is: how much risk is that debt creating?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Shanghai Awinic TechnologyLtd
How Much Debt Does Shanghai Awinic TechnologyLtd Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shanghai Awinic TechnologyLtd had CN¥666.7m of debt, an increase on CN¥571.5m, over one year. However, its balance sheet shows it holds CN¥2.30b in cash, so it actually has CN¥1.63b net cash.
How Strong Is Shanghai Awinic TechnologyLtd's Balance Sheet?
We can see from the most recent balance sheet that Shanghai Awinic TechnologyLtd had liabilities of CN¥858.0m falling due within a year, and liabilities of CN¥346.6m due beyond that. Offsetting this, it had CN¥2.30b in cash and CN¥90.8m in receivables that were due within 12 months. So it can boast CN¥1.19b more liquid assets than total liabilities.
This short term liquidity is a sign that Shanghai Awinic TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Awinic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shanghai Awinic 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, Shanghai Awinic TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.2b, which is a fall of 5.7%. We would much prefer see growth.
So How Risky Is Shanghai Awinic TechnologyLtd?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Shanghai Awinic TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥382m and booked a CN¥216m accounting loss. Given it only has net cash of CN¥1.63b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. 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 1 warning sign for Shanghai Awinic TechnologyLtd 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.