Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Sensteed Hi-Tech Group (SZSE:000981) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
What Is Sensteed Hi-Tech Group's Net Debt?
As you can see below, Sensteed Hi-Tech Group had CN¥5.93b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥730.8m in cash offsetting this, leading to net debt of about CN¥5.20b.
How Strong Is Sensteed Hi-Tech Group's Balance Sheet?
According to the last reported balance sheet, Sensteed Hi-Tech Group had liabilities of CN¥10.9b due within 12 months, and liabilities of CN¥2.71b due beyond 12 months. Offsetting these obligations, it had cash of CN¥730.8m as well as receivables valued at CN¥1.58b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.3b.
This deficit is considerable relative to its market capitalization of CN¥11.6b, so it does suggest shareholders should keep an eye on Sensteed Hi-Tech Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Sensteed Hi-Tech Group'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 Sensteed Hi-Tech Group wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to CN¥5.2b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Sensteed Hi-Tech Group still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥1.5b. 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¥1.3b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Sensteed Hi-Tech Group , 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.