Is Chengdu M&S Electronics TechnologyLtd (SHSE:688311) Using Debt In A Risky Way?

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 Chengdu M&S Electronics Technology Co.,Ltd. (SHSE:688311) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chengdu M&S Electronics TechnologyLtd

What Is Chengdu M&S Electronics TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Chengdu M&S Electronics TechnologyLtd had debt of CN¥372.9m, up from CN¥182.6m in one year. However, it does have CN¥431.7m in cash offsetting this, leading to net cash of CN¥58.8m.

A Look At Chengdu M&S Electronics TechnologyLtd's Liabilities

The latest balance sheet data shows that Chengdu M&S Electronics TechnologyLtd had liabilities of CN¥458.0m due within a year, and liabilities of CN¥388.8m falling due after that. Offsetting this, it had CN¥431.7m in cash and CN¥602.0m in receivables that were due within 12 months. So it actually has CN¥186.9m more liquid assets than total liabilities.

This surplus suggests that Chengdu M&S Electronics TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chengdu M&S Electronics TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chengdu M&S Electronics TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Chengdu M&S Electronics TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥177m, which is a fall of 70%. That makes us nervous, to say the least.

So How Risky Is Chengdu M&S Electronics TechnologyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Chengdu M&S Electronics TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥181m of cash and made a loss of CN¥130m. With only CN¥58.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Chengdu M&S Electronics TechnologyLtd you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.