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.' 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 can see that Shenzhen InfoGem Technologies Co., Ltd. (SZSE:300085) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Shenzhen InfoGem Technologies Carry?
As you can see below, at the end of December 2023, Shenzhen InfoGem Technologies had CN¥422.0m of debt, up from CN¥257.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥496.1m in cash, so it actually has CN¥74.2m net cash.
How Strong Is Shenzhen InfoGem Technologies' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shenzhen InfoGem Technologies had liabilities of CN¥747.5m due within 12 months and liabilities of CN¥10.9m due beyond that. Offsetting these obligations, it had cash of CN¥496.1m as well as receivables valued at CN¥253.5m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that Shenzhen InfoGem Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥6.73b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Shenzhen InfoGem Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Shenzhen InfoGem Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Shenzhen InfoGem Technologies had a loss before interest and tax, and actually shrunk its revenue by 9.1%, to CN¥1.0b. We would much prefer see growth.
So How Risky Is Shenzhen InfoGem Technologies?
While Shenzhen InfoGem Technologies lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥100m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 1 warning sign for Shenzhen InfoGem Technologies you should be aware of.
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.