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. We note that CGN Nuclear Technology Development Co., Ltd. (SZSE:000881) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for CGN Nuclear Technology Development
What Is CGN Nuclear Technology Development's Net Debt?
You can click the graphic below for the historical numbers, but it shows that CGN Nuclear Technology Development had CN¥2.79b of debt in September 2023, down from CN¥3.25b, one year before. However, it also had CN¥1.48b in cash, and so its net debt is CN¥1.32b.
A Look At CGN Nuclear Technology Development's Liabilities
Zooming in on the latest balance sheet data, we can see that CGN Nuclear Technology Development had liabilities of CN¥3.82b due within 12 months and liabilities of CN¥1.13b due beyond that. Offsetting this, it had CN¥1.48b in cash and CN¥3.42b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that CGN Nuclear Technology Development's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥6.25b company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CGN Nuclear Technology Development 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.
In the last year CGN Nuclear Technology Development had a loss before interest and tax, and actually shrunk its revenue by 44%, to CN¥5.0b. To be frank that doesn't bode well.
Caveat Emptor
Not only did CGN Nuclear Technology Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥75m. 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. For example, we would not want to see a repeat of last year's loss of CN¥116m. 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. We've identified 1 warning sign with CGN Nuclear Technology Development , and understanding them should be part of your investment process.
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.