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 can see that Cetc Potevio Science&Technology Co.,Ltd. (SZSE:002544) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Cetc Potevio Science&TechnologyLtd's Net Debt?
The image below, which you can click on for greater detail, shows that Cetc Potevio Science&TechnologyLtd had debt of CN¥550.7m at the end of September 2024, a reduction from CN¥1.04b over a year. But it also has CN¥1.44b in cash to offset that, meaning it has CN¥888.4m net cash.
A Look At Cetc Potevio Science&TechnologyLtd's Liabilities
We can see from the most recent balance sheet that Cetc Potevio Science&TechnologyLtd had liabilities of CN¥5.45b falling due within a year, and liabilities of CN¥67.9m due beyond that. Offsetting this, it had CN¥1.44b in cash and CN¥4.90b in receivables that were due within 12 months. So it can boast CN¥821.0m more liquid assets than total liabilities.
This surplus suggests that Cetc Potevio Science&TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cetc Potevio Science&TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cetc Potevio Science&TechnologyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Cetc Potevio Science&TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥5.0b. That makes us nervous, to say the least.
So How Risky Is Cetc Potevio Science&TechnologyLtd?
While Cetc Potevio Science&TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥317m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Cetc Potevio Science&TechnologyLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
