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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CPT Technology (Group) Co.,Ltd (SZSE:000536) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 CPT Technology (Group)Ltd
What Is CPT Technology (Group)Ltd's Debt?
As you can see below, at the end of September 2023, CPT Technology (Group)Ltd had CN¥3.64b of debt, up from CN¥3.33b a year ago. Click the image for more detail. However, it does have CN¥1.13b in cash offsetting this, leading to net debt of about CN¥2.51b.
How Strong Is CPT Technology (Group)Ltd's Balance Sheet?
According to the last reported balance sheet, CPT Technology (Group)Ltd had liabilities of CN¥3.46b due within 12 months, and liabilities of CN¥1.47b due beyond 12 months. Offsetting this, it had CN¥1.13b in cash and CN¥115.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥3.68b more than its cash and near-term receivables, combined.
This deficit isn't so bad because CPT Technology (Group)Ltd is worth CN¥10.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CPT Technology (Group)Ltd 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, CPT Technology (Group)Ltd made a loss at the EBIT level, and saw its revenue drop to CN¥1.1b, which is a fall of 59%. To be frank that doesn't bode well.
Caveat Emptor
Not only did CPT Technology (Group)Ltd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥1.5b at the EBIT level. 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¥818m of cash over the last year. So suffice it to say we consider the stock very risky. 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 2 warning signs for CPT Technology (Group)Ltd you should know about.
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.