David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Zhejiang Akcome New Energy Technology Co.,Ltd. (SZSE:002610) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Zhejiang Akcome New Energy TechnologyLtd
What Is Zhejiang Akcome New Energy TechnologyLtd's Debt?
As you can see below, Zhejiang Akcome New Energy TechnologyLtd had CN¥3.57b of debt at September 2023, down from CN¥3.98b a year prior. However, it also had CN¥2.05b in cash, and so its net debt is CN¥1.53b.
How Healthy Is Zhejiang Akcome New Energy TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Zhejiang Akcome New Energy TechnologyLtd had liabilities of CN¥7.75b due within a year, and liabilities of CN¥545.5m falling due after that. On the other hand, it had cash of CN¥2.05b and CN¥3.00b worth of receivables due within a year. So it has liabilities totalling CN¥3.25b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Zhejiang Akcome New Energy TechnologyLtd has a market capitalization of CN¥10.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without 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 Zhejiang Akcome New Energy TechnologyLtd 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, Zhejiang Akcome New Energy TechnologyLtd reported revenue of CN¥6.1b, which is a gain of 26%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Even though Zhejiang Akcome New Energy TechnologyLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥267m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥202m of cash over the last year. So to be blunt we think it is risky. 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 - Zhejiang Akcome New Energy TechnologyLtd has 1 warning sign we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.