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.' 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 Shenzhen Neoway Technology Co.,Ltd. (SHSE:688159) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Shenzhen Neoway TechnologyLtd
What Is Shenzhen Neoway TechnologyLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shenzhen Neoway TechnologyLtd had CN¥353.5m of debt, an increase on CN¥225.2m, over one year. On the flip side, it has CN¥249.7m in cash leading to net debt of about CN¥103.8m.
How Strong Is Shenzhen Neoway TechnologyLtd's Balance Sheet?
We can see from the most recent balance sheet that Shenzhen Neoway TechnologyLtd had liabilities of CN¥703.5m falling due within a year, and liabilities of CN¥7.48m due beyond that. On the other hand, it had cash of CN¥249.7m and CN¥451.4m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
Having regard to Shenzhen Neoway TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥3.65b company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Neoway TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Shenzhen Neoway TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 4.8%, to CN¥966m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Shenzhen Neoway TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥114m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥35m 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. For example - Shenzhen Neoway TechnologyLtd has 1 warning sign we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.