Sensteed Hi-Tech Group (SZSE:000981) Has Debt But No Earnings; Should You Worry?

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. We note that Sensteed Hi-Tech Group (SZSE:000981) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sensteed Hi-Tech Group

What Is Sensteed Hi-Tech Group's Debt?

The chart below, which you can click on for greater detail, shows that Sensteed Hi-Tech Group had CN¥5.78b in debt in March 2024; about the same as the year before. On the flip side, it has CN¥1.05b in cash leading to net debt of about CN¥4.73b.

How Strong Is Sensteed Hi-Tech Group's Balance Sheet?

We can see from the most recent balance sheet that Sensteed Hi-Tech Group had liabilities of CN¥8.80b falling due within a year, and liabilities of CN¥2.65b due beyond that. On the other hand, it had cash of CN¥1.05b and CN¥1.59b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.80b.

This deficit is considerable relative to its market capitalization of CN¥8.92b, so it does suggest shareholders should keep an eye on Sensteed Hi-Tech Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sensteed Hi-Tech Group will need earnings to service that debt. 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.

In the last year Sensteed Hi-Tech Group wasn't profitable at an EBIT level, but managed to grow its revenue by 50%, to CN¥5.4b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Sensteed Hi-Tech Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥671m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥1.4b. So we do think this stock is quite 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 1 warning sign for Sensteed Hi-Tech Group you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.