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.' 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. As with many other companies Vanjee Technology Co., Ltd. (SZSE:300552) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Vanjee Technology's Debt?
As you can see below, at the end of December 2023, Vanjee Technology had CN¥45.0m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥537.3m in cash offsetting this, leading to net cash of CN¥492.3m.
A Look At Vanjee Technology's Liabilities
Zooming in on the latest balance sheet data, we can see that Vanjee Technology had liabilities of CN¥813.7m due within 12 months and liabilities of CN¥131.7m due beyond that. Offsetting these obligations, it had cash of CN¥537.3m as well as receivables valued at CN¥1.13b due within 12 months. So it actually has CN¥723.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Vanjee Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Vanjee Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vanjee Technology 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, Vanjee Technology reported revenue of CN¥909m, which is a gain of 4.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Vanjee Technology?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Vanjee Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥285m of cash and made a loss of CN¥386m. But at least it has CN¥492.3m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Vanjee Technology , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.