Is Shenzhen Dawei Innovation Technology (SZSE:002213) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shenzhen Dawei Innovation Technology Co., Ltd. (SZSE:002213) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Shenzhen Dawei Innovation Technology

What Is Shenzhen Dawei Innovation Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Dawei Innovation Technology had debt of CN¥28.4m, up from CN¥22.1m in one year. However, its balance sheet shows it holds CN¥159.4m in cash, so it actually has CN¥131.0m net cash.

A Look At Shenzhen Dawei Innovation Technology's Liabilities

We can see from the most recent balance sheet that Shenzhen Dawei Innovation Technology had liabilities of CN¥126.9m falling due within a year, and liabilities of CN¥2.06m due beyond that. Offsetting this, it had CN¥159.4m in cash and CN¥123.6m in receivables that were due within 12 months. So it actually has CN¥154.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Dawei Innovation Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Dawei Innovation Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Dawei Innovation Technology 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, Shenzhen Dawei Innovation Technology reported revenue of CN¥1.0b, which is a gain of 41%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Shenzhen Dawei Innovation Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Shenzhen Dawei Innovation Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥190m and booked a CN¥58m accounting loss. With only CN¥131.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Shenzhen Dawei Innovation Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Shenzhen Dawei Innovation Technology , and understanding them should be part of your investment process.

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.