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.' 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 Shenzhen Minkave Technology Co., Ltd. (SZSE:300506) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shenzhen Minkave Technology

What Is Shenzhen Minkave Technology's Net Debt?

As you can see below, Shenzhen Minkave Technology had CN¥361.3m of debt at March 2023, down from CN¥438.2m a year prior. However, it does have CN¥29.7m in cash offsetting this, leading to net debt of about CN¥331.5m.

How Healthy Is Shenzhen Minkave Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Minkave Technology had liabilities of CN¥877.3m due within 12 months and liabilities of CN¥24.5m due beyond that. On the other hand, it had cash of CN¥29.7m and CN¥955.7m worth of receivables due within a year. So it can boast CN¥83.5m more liquid assets than total liabilities.

Having regard to Shenzhen Minkave Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.82b company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Minkave 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.

Over 12 months, Shenzhen Minkave Technology made a loss at the EBIT level, and saw its revenue drop to CN¥23m, which is a fall of 94%. That makes us nervous, to say the least.

Caveat Emptor

While Shenzhen Minkave Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥412m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. Be aware that Shenzhen Minkave Technology is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.