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. We can see that BIWIN Storage Technology Co., Ltd. (SHSE:688525) does use debt in its business. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is BIWIN Storage Technology's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 BIWIN Storage Technology had CN¥3.62b of debt, an increase on CN¥1.59b, over one year. However, because it has a cash reserve of CN¥546.0m, its net debt is less, at about CN¥3.07b.
A Look At BIWIN Storage Technology's Liabilities
The latest balance sheet data shows that BIWIN Storage Technology had liabilities of CN¥3.65b due within a year, and liabilities of CN¥692.3m falling due after that. Offsetting this, it had CN¥546.0m in cash and CN¥546.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥3.25b more than its cash and near-term receivables, combined.
Of course, BIWIN Storage Technology has a market capitalization of CN¥17.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since BIWIN Storage Technology 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.
Over 12 months, BIWIN Storage Technology reported revenue of CN¥2.9b, which is a gain of 6.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, BIWIN Storage Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥457m at the EBIT level. 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. Another cause for caution is that is bled CN¥2.6b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that BIWIN Storage Technology is showing 2 warning signs in our investment analysis , 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.