Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Shenzhen Neoway Technology Co.,Ltd. (SHSE:688159) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Shenzhen Neoway TechnologyLtd
What Is Shenzhen Neoway TechnologyLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Shenzhen Neoway TechnologyLtd had debt of CN¥299.3m, up from CN¥216.2m in one year. However, because it has a cash reserve of CN¥224.6m, its net debt is less, at about CN¥74.7m.
How Healthy Is Shenzhen Neoway TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Shenzhen Neoway TechnologyLtd had liabilities of CN¥632.7m due within a year, and liabilities of CN¥7.27m falling due after that. Offsetting this, it had CN¥224.6m in cash and CN¥486.6m in receivables that were due within 12 months. So it actually has CN¥71.3m more liquid assets than total liabilities.
This state of affairs indicates that Shenzhen Neoway TechnologyLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.35b company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Neoway TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Shenzhen Neoway TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 5.8%, to CN¥908m. We would much prefer see growth.
Caveat Emptor
Importantly, Shenzhen Neoway TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥127m. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Shenzhen Neoway TechnologyLtd 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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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.