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.' 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. Importantly, ArcherMind Technology (Nanjing) Co., Ltd. (SZSE:300598) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for ArcherMind Technology (Nanjing)
What Is ArcherMind Technology (Nanjing)'s Debt?
As you can see below, at the end of September 2023, ArcherMind Technology (Nanjing) had CN¥454.1m of debt, up from CN¥352.3m a year ago. Click the image for more detail. However, it does have CN¥555.4m in cash offsetting this, leading to net cash of CN¥101.3m.
A Look At ArcherMind Technology (Nanjing)'s Liabilities
We can see from the most recent balance sheet that ArcherMind Technology (Nanjing) had liabilities of CN¥845.8m falling due within a year, and liabilities of CN¥6.18m due beyond that. On the other hand, it had cash of CN¥555.4m and CN¥713.8m worth of receivables due within a year. So it can boast CN¥417.3m more liquid assets than total liabilities.
This surplus suggests that ArcherMind Technology (Nanjing) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ArcherMind Technology (Nanjing) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ArcherMind Technology (Nanjing) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, ArcherMind Technology (Nanjing) made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 3.6%. We would much prefer see growth.
So How Risky Is ArcherMind Technology (Nanjing)?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months ArcherMind Technology (Nanjing) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥106m of cash and made a loss of CN¥206m. With only CN¥101.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For instance, we've identified 3 warning signs for ArcherMind Technology (Nanjing) (1 can't be ignored) you should be aware of.
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.