Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Shenzhen Longsys Electronics Co., Ltd. (SZSE:301308) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Shenzhen Longsys Electronics's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Longsys Electronics had debt of CN¥3.21b, up from CN¥1.11b in one year. On the flip side, it has CN¥1.83b in cash leading to net debt of about CN¥1.38b.
A Look At Shenzhen Longsys Electronics' Liabilities
The latest balance sheet data shows that Shenzhen Longsys Electronics had liabilities of CN¥3.31b due within a year, and liabilities of CN¥1.57b falling due after that. Offsetting these obligations, it had cash of CN¥1.83b as well as receivables valued at CN¥1.36b due within 12 months. So it has liabilities totalling CN¥1.70b more than its cash and near-term receivables, combined.
Given Shenzhen Longsys Electronics has a market capitalization of CN¥36.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shenzhen Longsys Electronics 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.
Over 12 months, Shenzhen Longsys Electronics made a loss at the EBIT level, and saw its revenue drop to CN¥8.3b, which is a fall of 4.8%. That's not what we would hope to see.
Caveat Emptor
Importantly, Shenzhen Longsys Electronics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥1.2b 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. However, it doesn't help that it burned through CN¥2.2b of cash over the last year. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Shenzhen Longsys Electronics's profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.