Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Chipsea Technologies (shenzhen) Corp. (SHSE:688595) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Chipsea Technologies (shenzhen)'s Net Debt?
The image below, which you can click on for greater detail, shows that Chipsea Technologies (shenzhen) had debt of CN¥404.4m at the end of March 2024, a reduction from CN¥473.9m over a year. However, it does have CN¥451.4m in cash offsetting this, leading to net cash of CN¥47.0m.
A Look At Chipsea Technologies (shenzhen)'s Liabilities
Zooming in on the latest balance sheet data, we can see that Chipsea Technologies (shenzhen) had liabilities of CN¥155.7m due within 12 months and liabilities of CN¥390.3m due beyond that. Offsetting these obligations, it had cash of CN¥451.4m as well as receivables valued at CN¥180.6m due within 12 months. So it can boast CN¥86.0m more liquid assets than total liabilities.
Having regard to Chipsea Technologies (shenzhen)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.36b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Chipsea Technologies (shenzhen) has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Chipsea Technologies (shenzhen)'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.
Over 12 months, Chipsea Technologies (shenzhen) saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is Chipsea Technologies (shenzhen)?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Chipsea Technologies (shenzhen) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥64m of cash and made a loss of CN¥130m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥47.0m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example - Chipsea Technologies (shenzhen) has 1 warning sign we think you should be aware of.
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.