Sensteed Hi-Tech Group (SZSE:000981) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sensteed Hi-Tech Group

What Is Sensteed Hi-Tech Group's Debt?

The image below, which you can click on for greater detail, shows that Sensteed Hi-Tech Group had debt of CN¥4.49b at the end of September 2024, a reduction from CN¥5.93b over a year. On the flip side, it has CN¥524.8m in cash leading to net debt of about CN¥3.96b.

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

According to the last reported balance sheet, Sensteed Hi-Tech Group had liabilities of CN¥7.13b due within 12 months, and liabilities of CN¥2.49b due beyond 12 months. On the other hand, it had cash of CN¥524.8m and CN¥2.12b worth of receivables due within a year. So its liabilities total CN¥6.98b more than the combination of its cash and short-term receivables.

Sensteed Hi-Tech Group has a market capitalization of CN¥20.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Sensteed Hi-Tech Group made a loss at the EBIT level, and saw its revenue drop to CN¥5.0b, which is a fall of 3.7%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Sensteed Hi-Tech Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥79m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥1.7b. So we do think this stock is quite risky. 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. For example, we've discovered 1 warning sign for Sensteed Hi-Tech Group that you should be aware of before investing here.

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.