David Iben put it well when he said, “Volatility is not a risk we care about. What we care about is avoiding permanent loss of capital.” It is only natural to consider a company’s balance sheet when examining how risky it is, since debt is often involved when a company collapses. We find that Sensteed Hi-Tech Group (SZSE:000981) has debt on its balance sheet. But should shareholders be concerned about the use of debt?

Why is debt risky?

Debt helps a company until it struggles to pay it back with either fresh capital or free cash flow. If the company can’t meet its legal obligations to pay off debt, shareholders could end up empty-handed. However, a more common (but still painful) scenario is that the company has to raise new equity at a low price, permanently diluting shareholders. Of course, many companies use debt to fund growth without negative consequences. When we examine debt levels, we first look at both cash and debt levels together.

Check out our latest analysis for Sensteed Hi-Tech Group

How much debt does Sensteed Hi-Tech Group have?

The chart below, which you can click on for more details, shows that Sensteed Hi-Tech Group had CN¥5.78 billion in debt as of March 2024; roughly the same as the year before. On the other hand, it has CN¥1.05 billion in cash, resulting in net debt of about CN¥4.73 billion.

How strong is the balance sheet of the Sensteed Hi-Tech Group?

According to the most recent balance sheet, Sensteed Hi-Tech Group has liabilities of CNY 8.80 billion due within one year and liabilities of CNY 2.65 billion due beyond that. On the other hand, it had cash of CNY 1.05 billion and receivables of CNY 1.59 billion due within one year. So its liabilities exceed the sum of its cash and (short-term) receivables by CNY 8.80 billion.

This deficit is significant relative to its market capitalization of CNY8.92b, so it makes sense for shareholders to keep an eye on Sensteed Hi-Tech Group’s debt levels. This suggests shareholders would be heavily diluted if the company had to repair its balance sheet in a hurry. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt completely in isolation, as Sensteed Hi-Tech Group needs profits to service that debt. So if you want to learn more about its profits, it might be worth looking at this graph of its long-term earnings trend.

Last year, Sensteed Hi-Tech Group was not profitable at EBIT level, but managed to increase its revenue by 50% to CNY 5.4 billion. With a little luck, the company will be able to become profitable.

Reservation by the buyer

Although Sensteed Hi-Tech Group has managed to grow its revenue quite cleverly, the harsh truth is that it loses money on EBIT. In fact, it lost CN¥671 million at the EBIT level. When we look at this and recall the liabilities on its balance sheet relative to cash, it seems unwise to us that the company has debt. So we think its balance sheet is a little stretched, but not beyond repair. For example, we wouldn’t want to see a repeat of last year’s CN¥1.4 billion loss. So we think this stock is quite risky. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, every company can contain risks that exist outside the balance sheet. Case in point: we found 1 warning signal for Sensteed Hi-Tech Group You should be aware.

Ultimately, it’s often better to focus on companies that have no net debt. You can access our special list of such companies (all with a track record of earnings growth). It’s free.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.