The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Winner Technology Co., Inc. (SZSE:300609) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Winner Technology's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Winner Technology had CN¥39.0m of debt, an increase on CN¥12.0m, over one year. However, it does have CN¥234.7m in cash offsetting this, leading to net cash of CN¥195.6m.
How Healthy Is Winner Technology's Balance Sheet?
We can see from the most recent balance sheet that Winner Technology had liabilities of CN¥158.0m falling due within a year, and liabilities of CN¥29.3m due beyond that. Offsetting this, it had CN¥234.7m in cash and CN¥225.7m in receivables that were due within 12 months. So it can boast CN¥273.1m more liquid assets than total liabilities.
This surplus suggests that Winner Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Winner Technology 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 Winner Technology'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.
In the last year Winner Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to CN¥371m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Winner Technology?
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 Winner Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥133m of cash and made a loss of CN¥52m. But at least it has CN¥195.6m on the balance sheet to spend on growth, near-term. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Winner Technology (including 3 which are potentially serious) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.