Is Xingmin Intelligent Transportation Systems (Group) (SZSE:002355) A Risky Investment?

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. Importantly, Xingmin Intelligent Transportation Systems (Group) Co., Ltd. (SZSE:002355) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Xingmin Intelligent Transportation Systems (Group)

How Much Debt Does Xingmin Intelligent Transportation Systems (Group) Carry?

The image below, which you can click on for greater detail, shows that Xingmin Intelligent Transportation Systems (Group) had debt of CN¥463.4m at the end of September 2024, a reduction from CN¥613.1m over a year. On the flip side, it has CN¥100.4m in cash leading to net debt of about CN¥363.0m.

A Look At Xingmin Intelligent Transportation Systems (Group)'s Liabilities

The latest balance sheet data shows that Xingmin Intelligent Transportation Systems (Group) had liabilities of CN¥1.02b due within a year, and liabilities of CN¥213.9m falling due after that. Offsetting these obligations, it had cash of CN¥100.4m as well as receivables valued at CN¥181.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥953.7m.

This deficit isn't so bad because Xingmin Intelligent Transportation Systems (Group) is worth CN¥4.71b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Xingmin Intelligent Transportation Systems (Group)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Xingmin Intelligent Transportation Systems (Group) saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Xingmin Intelligent Transportation Systems (Group) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥136m at the EBIT level. 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¥18m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Xingmin Intelligent Transportation Systems (Group) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.