Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sensteed Hi-Tech Group (SZSE:000981) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
Check out our latest analysis for Sensteed Hi-Tech Group
How Much Debt Does Sensteed Hi-Tech Group Carry?
The image below, which you can click on for greater detail, shows that Sensteed Hi-Tech Group had debt of CN¥5.96b at the end of June 2023, a reduction from CN¥6.66b over a year. However, it also had CN¥675.3m in cash, and so its net debt is CN¥5.29b.
How Strong Is Sensteed Hi-Tech Group's Balance Sheet?
According to the last reported balance sheet, Sensteed Hi-Tech Group had liabilities of CN¥10.4b due within 12 months, and liabilities of CN¥2.69b due beyond 12 months. Offsetting these obligations, it had cash of CN¥675.3m as well as receivables valued at CN¥1.33b due within 12 months. So its liabilities total CN¥11.1b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of CN¥11.9b, so it does suggest shareholders should keep an eye on Sensteed Hi-Tech Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sensteed Hi-Tech Group 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.
Over 12 months, Sensteed Hi-Tech Group reported revenue of CN¥4.7b, which is a gain of 31%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly appreciate Sensteed Hi-Tech Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CN¥1.5b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥1.2b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Sensteed Hi-Tech Group has 2 warning signs we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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