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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Veken Technology Co., Ltd. (SHSE:600152) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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.
See our latest analysis for Veken Technology
What Is Veken Technology's Debt?
The image below, which you can click on for greater detail, shows that Veken Technology had debt of CN¥140.4m at the end of September 2024, a reduction from CN¥173.8m over a year. However, it does have CN¥601.0m in cash offsetting this, leading to net cash of CN¥460.6m.
How Strong Is Veken Technology's Balance Sheet?
The latest balance sheet data shows that Veken Technology had liabilities of CN¥1.15b due within a year, and liabilities of CN¥139.3m falling due after that. Offsetting this, it had CN¥601.0m in cash and CN¥452.3m in receivables that were due within 12 months. So its liabilities total CN¥231.3m more than the combination of its cash and short-term receivables.
Given Veken Technology has a market capitalization of CN¥3.68b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Veken Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Veken 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, Veken Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 5.9%. We would much prefer see growth.
So How Risky Is Veken Technology?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Veken Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥134m and booked a CN¥42m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥460.6m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 1 warning sign for Veken Technology 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.
About SHSE:600152
Veken Technology
Engages in the research and development, manufacture, and sale of lithium batteries.
Flawless balance sheet and slightly overvalued.