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. Importantly, Skyverse Technology Co., Ltd. (SHSE:688361) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Skyverse Technology's Net Debt?
As you can see below, Skyverse Technology had CN¥81.2m of debt at September 2023, down from CN¥164.6m a year prior. However, it does have CN¥1.41b in cash offsetting this, leading to net cash of CN¥1.33b.
A Look At Skyverse Technology's Liabilities
We can see from the most recent balance sheet that Skyverse Technology had liabilities of CN¥905.1m falling due within a year, and liabilities of CN¥82.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.41b as well as receivables valued at CN¥129.1m due within 12 months. So it actually has CN¥552.7m more liquid assets than total liabilities.
This surplus suggests that Skyverse Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Skyverse Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Skyverse Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥144m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Skyverse Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Skyverse Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Skyverse Technology recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing Up
While it is always sensible to investigate a company's debt, in this case Skyverse Technology has CN¥1.33b in net cash and a decent-looking balance sheet. So we are not troubled with Skyverse Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Skyverse Technology, you may well want to click here to check an interactive graph of its earnings per share history.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
