Would Sensteed Hi-Tech Group (SZSE:000981) Be Better Off With Less Debt?

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 Sensteed Hi-Tech Group (SZSE:000981) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sensteed Hi-Tech Group

What Is Sensteed Hi-Tech Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Sensteed Hi-Tech Group had CN¥4.49b of debt in September 2024, down from CN¥5.93b, one year before. However, because it has a cash reserve of CN¥524.8m, its net debt is less, at about CN¥3.96b.

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

Zooming in on the latest balance sheet data, we can see that Sensteed Hi-Tech Group had liabilities of CN¥7.13b due within 12 months and liabilities of CN¥2.49b due beyond that. 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 outweigh the sum of its cash and (near-term) receivables by CN¥6.98b.

This deficit isn't so bad because Sensteed Hi-Tech Group is worth CN¥15.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

In the last year Sensteed Hi-Tech Group had a loss before interest and tax, and actually shrunk its revenue by 3.7%, to CN¥5.0b. We would much prefer see growth.

Caveat Emptor

Importantly, Sensteed Hi-Tech Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥79m 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. 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 to be blunt we do think it is 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. Case in point: We've spotted 2 warning signs for Sensteed Hi-Tech Group 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.