Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Sichuan Shudao Equipment & Technology Co.,Ltd. (SZSE:300540) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Sichuan Shudao Equipment & TechnologyLtd Carry?
As you can see below, at the end of September 2023, Sichuan Shudao Equipment & TechnologyLtd had CN¥99.8m of debt, up from CN¥55.7m a year ago. Click the image for more detail. But it also has CN¥153.5m in cash to offset that, meaning it has CN¥53.7m net cash.
A Look At Sichuan Shudao Equipment & TechnologyLtd's Liabilities
We can see from the most recent balance sheet that Sichuan Shudao Equipment & TechnologyLtd had liabilities of CN¥552.2m falling due within a year, and liabilities of CN¥70.3m due beyond that. On the other hand, it had cash of CN¥153.5m and CN¥488.3m worth of receivables due within a year. So it actually has CN¥19.3m more liquid assets than total liabilities.
Having regard to Sichuan Shudao Equipment & TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥3.87b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Sichuan Shudao Equipment & TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sichuan Shudao Equipment & TechnologyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Sichuan Shudao Equipment & TechnologyLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is Sichuan Shudao Equipment & TechnologyLtd?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Sichuan Shudao Equipment & TechnologyLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥80m of cash and made a loss of CN¥19m. However, it has net cash of CN¥53.7m, so it has a bit of time before it will need more capital. 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. 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. Be aware that Sichuan Shudao Equipment & TechnologyLtd is showing 1 warning sign in our investment analysis , 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.
