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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Anhui Sinonet & Xinlong Science & Technology Co., Ltd. (SZSE:002298) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Anhui Sinonet & Xinlong Science & Technology's Debt?
You can click the graphic below for the historical numbers, but it shows that Anhui Sinonet & Xinlong Science & Technology had CN¥862.9m of debt in September 2023, down from CN¥1.07b, one year before. On the flip side, it has CN¥381.3m in cash leading to net debt of about CN¥481.6m.
A Look At Anhui Sinonet & Xinlong Science & Technology's Liabilities
According to the last reported balance sheet, Anhui Sinonet & Xinlong Science & Technology had liabilities of CN¥2.62b due within 12 months, and liabilities of CN¥392.0m due beyond 12 months. On the other hand, it had cash of CN¥381.3m and CN¥2.39b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥236.5m.
Of course, Anhui Sinonet & Xinlong Science & Technology has a market capitalization of CN¥3.77b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Anhui Sinonet & Xinlong Science & Technology'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.
Over 12 months, Anhui Sinonet & Xinlong Science & Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.7b, which is a fall of 44%. To be frank that doesn't bode well.
Caveat Emptor
While Anhui Sinonet & Xinlong Science & Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥674m. 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¥127m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. Be aware that Anhui Sinonet & Xinlong Science & Technology is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
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.
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.