Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Chipsea Technologies (shenzhen) Corp. (SHSE:688595) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Chipsea Technologies (shenzhen)
What Is Chipsea Technologies (shenzhen)'s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Chipsea Technologies (shenzhen) had CN¥389.4m of debt in September 2023, down from CN¥463.7m, one year before. But on the other hand it also has CN¥543.0m in cash, leading to a CN¥153.6m net cash position.
How Strong Is Chipsea Technologies (shenzhen)'s Balance Sheet?
We can see from the most recent balance sheet that Chipsea Technologies (shenzhen) had liabilities of CN¥129.0m falling due within a year, and liabilities of CN¥378.4m due beyond that. On the other hand, it had cash of CN¥543.0m and CN¥192.8m worth of receivables due within a year. So it can boast CN¥228.4m more liquid assets than total liabilities.
This surplus suggests that Chipsea Technologies (shenzhen) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chipsea Technologies (shenzhen) boasts net cash, 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 Chipsea Technologies (shenzhen) can strengthen its balance sheet over time. 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 Chipsea Technologies (shenzhen) had a loss before interest and tax, and actually shrunk its revenue by 39%, to CN¥416m. That makes us nervous, to say the least.
So How Risky Is Chipsea Technologies (shenzhen)?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Chipsea Technologies (shenzhen) had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥103m of cash and made a loss of CN¥89m. Given it only has net cash of CN¥153.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Chipsea Technologies (shenzhen) you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.