Guangdong Lyric Robot AutomationLtd (SHSE:688499) Has Debt But No Earnings; Should You Worry?

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. We note that Guangdong Lyric Robot Automation Co.,Ltd. (SHSE:688499) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Guangdong Lyric Robot AutomationLtd

What Is Guangdong Lyric Robot AutomationLtd's Debt?

As you can see below, at the end of September 2024, Guangdong Lyric Robot AutomationLtd had CN¥2.95b of debt, up from CN¥2.30b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥1.10b, its net debt is less, at about CN¥1.85b.

A Look At Guangdong Lyric Robot AutomationLtd's Liabilities

The latest balance sheet data shows that Guangdong Lyric Robot AutomationLtd had liabilities of CN¥5.61b due within a year, and liabilities of CN¥1.70b falling due after that. On the other hand, it had cash of CN¥1.10b and CN¥2.47b worth of receivables due within a year. So its liabilities total CN¥3.74b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥3.99b, so it does suggest shareholders should keep an eye on Guangdong Lyric Robot AutomationLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Guangdong Lyric Robot AutomationLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Guangdong Lyric Robot AutomationLtd made a loss at the EBIT level, and saw its revenue drop to CN¥3.1b, which is a fall of 44%. That makes us nervous, to say the least.

Caveat Emptor

While Guangdong Lyric Robot AutomationLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥704m 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. Another cause for caution is that is bled CN¥152m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Guangdong Lyric Robot AutomationLtd (of which 3 are concerning!) 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.