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.' 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. We can see that Siasun Robot&Automation Co.,Ltd. (SZSE:300024) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Siasun Robot&AutomationLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Siasun Robot&AutomationLtd had CN¥2.37b of debt, an increase on CN¥2.17b, over one year. However, it does have CN¥1.92b in cash offsetting this, leading to net debt of about CN¥457.4m.
A Look At Siasun Robot&AutomationLtd's Liabilities
The latest balance sheet data shows that Siasun Robot&AutomationLtd had liabilities of CN¥6.41b due within a year, and liabilities of CN¥1.55b falling due after that. On the other hand, it had cash of CN¥1.92b and CN¥2.12b worth of receivables due within a year. So its liabilities total CN¥3.91b more than the combination of its cash and short-term receivables.
Siasun Robot&AutomationLtd has a market capitalization of CN¥17.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Siasun Robot&AutomationLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Siasun Robot&AutomationLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to CN¥4.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Even though Siasun Robot&AutomationLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥651m. 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. However, it doesn't help that it burned through CN¥302m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 learn about the 2 warning signs we've spotted with Siasun Robot&AutomationLtd (including 1 which is a bit concerning) .
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.
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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.