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.' 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 Shenzhen Sunwin Intelligent Co., Ltd. (SZSE:300044) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is Shenzhen Sunwin Intelligent's Debt?

As you can see below, Shenzhen Sunwin Intelligent had CN¥413.0m of debt at September 2023, down from CN¥563.2m a year prior. However, because it has a cash reserve of CN¥66.6m, its net debt is less, at about CN¥346.4m.

How Healthy Is Shenzhen Sunwin Intelligent's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Sunwin Intelligent had liabilities of CN¥586.0m falling due within a year, and liabilities of CN¥412.8m due beyond that. Offsetting these obligations, it had cash of CN¥66.6m as well as receivables valued at CN¥945.3m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Shenzhen Sunwin Intelligent's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.22b company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Sunwin Intelligent'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.

Over 12 months, Shenzhen Sunwin Intelligent made a loss at the EBIT level, and saw its revenue drop to CN¥472m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

While Shenzhen Sunwin Intelligent's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥72m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Shenzhen Sunwin Intelligent .

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.