Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that SVG Tech Group Co.,Ltd. (SZSE:300331) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does SVG Tech GroupLtd Carry?
As you can see below, SVG Tech GroupLtd had CN¥689.9m of debt at September 2023, down from CN¥785.4m a year prior. However, it does have CN¥642.0m in cash offsetting this, leading to net debt of about CN¥48.0m.
How Healthy Is SVG Tech GroupLtd's Balance Sheet?
We can see from the most recent balance sheet that SVG Tech GroupLtd had liabilities of CN¥1.13b falling due within a year, and liabilities of CN¥237.0m due beyond that. Offsetting this, it had CN¥642.0m in cash and CN¥683.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥42.3m.
Having regard to SVG Tech GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.32b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, SVG Tech GroupLtd has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is SVG Tech GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, SVG Tech GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 12%. We would much prefer see growth.
Caveat Emptor
While SVG Tech GroupLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥311m at the EBIT level. 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. However, it doesn't help that it burned through CN¥23m of cash over the last year. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 2 warning signs for SVG Tech GroupLtd you should be aware of, and 1 of them is a bit concerning.
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.