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 Shenzhen Silver Basis Technology Co., Ltd. (SZSE:002786) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Shenzhen Silver Basis Technology
What Is Shenzhen Silver Basis Technology's Net Debt?
As you can see below, Shenzhen Silver Basis Technology had CN¥1.49b of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥248.1m in cash leading to net debt of about CN¥1.24b.SZSE:002786 Debt to Equity History December 15th 2022
A Look At Shenzhen Silver Basis Technology's Liabilities
We can see from the most recent balance sheet that Shenzhen Silver Basis Technology had liabilities of CN¥3.20b falling due within a year, and liabilities of CN¥565.4m due beyond that. Offsetting this, it had CN¥248.1m in cash and CN¥784.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.74b more than its cash and near-term receivables, combined.
Shenzhen Silver Basis Technology has a market capitalization of CN¥4.58b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Silver Basis Technology will need earnings to service that debt. 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 Shenzhen Silver Basis Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥2.8b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Shenzhen Silver Basis Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥206m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥214m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shenzhen Silver Basis Technology (1 is a bit unpleasant) you should be aware of.
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.