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. Importantly, SZZT Electronics CO.,LTD (SZSE:002197) does carry debt. But should shareholders be worried about its use of debt?
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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for SZZT ElectronicsLTD
How Much Debt Does SZZT ElectronicsLTD Carry?
The image below, which you can click on for greater detail, shows that at September 2023 SZZT ElectronicsLTD had debt of CN¥3.56b, up from CN¥3.03b in one year. However, it does have CN¥568.3m in cash offsetting this, leading to net debt of about CN¥2.99b.
A Look At SZZT ElectronicsLTD's Liabilities
Zooming in on the latest balance sheet data, we can see that SZZT ElectronicsLTD had liabilities of CN¥1.93b due within 12 months and liabilities of CN¥2.30b due beyond that. On the other hand, it had cash of CN¥568.3m and CN¥1.09b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.57b.
While this might seem like a lot, it is not so bad since SZZT ElectronicsLTD has a market capitalization of CN¥6.08b, 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 it is SZZT ElectronicsLTD's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year SZZT ElectronicsLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥1.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, SZZT ElectronicsLTD had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥351m. 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. We would feel better if it turned its trailing twelve month loss of CN¥525m into a profit. So to be blunt we do think it is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with SZZT ElectronicsLTD .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.