Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Cubic Digital Technology Co., Ltd. (SZSE:300344) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Cubic Digital Technology
What Is Cubic Digital Technology's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Cubic Digital Technology had debt of CN¥33.0m, up from CN¥14.1m in one year. On the flip side, it has CN¥17.9m in cash leading to net debt of about CN¥15.2m.
How Strong Is Cubic Digital Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Cubic Digital Technology had liabilities of CN¥157.6m due within 12 months and liabilities of CN¥7.87m due beyond that. Offsetting this, it had CN¥17.9m in cash and CN¥228.1m in receivables that were due within 12 months. So it can boast CN¥80.5m more liquid assets than total liabilities.
This state of affairs indicates that Cubic Digital Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.22b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Cubic Digital Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Cubic Digital 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, Cubic Digital Technology made a loss at the EBIT level, and saw its revenue drop to CN¥537m, which is a fall of 15%. That's not what we would hope to see.
Caveat Emptor
While Cubic Digital 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. Indeed, it lost CN¥106m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Cubic Digital Technology you should know about.
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.