Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that iFLYTEK CO.,LTD (SZSE:002230) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 iFLYTEKLTD
What Is iFLYTEKLTD's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 iFLYTEKLTD had debt of CN¥4.78b, up from CN¥1.95b in one year. However, it also had CN¥3.40b in cash, and so its net debt is CN¥1.39b.
How Strong Is iFLYTEKLTD's Balance Sheet?
We can see from the most recent balance sheet that iFLYTEKLTD had liabilities of CN¥13.0b falling due within a year, and liabilities of CN¥5.45b due beyond that. Offsetting these obligations, it had cash of CN¥3.40b as well as receivables valued at CN¥14.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥804.0m.
Having regard to iFLYTEKLTD's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥104.2b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, iFLYTEKLTD has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if iFLYTEKLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, iFLYTEKLTD made a loss at the EBIT level, and saw its revenue drop to CN¥19b, which is a fall of 6.6%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months iFLYTEKLTD produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥773m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥2.0b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for iFLYTEKLTD you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.