Is Ocean's King Lighting Science & Technology (SZSE:002724) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Ocean's King Lighting Science & Technology Co., Ltd (SZSE:002724) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ocean's King Lighting Science & Technology

What Is Ocean's King Lighting Science & Technology's Debt?

As you can see below, at the end of June 2024, Ocean's King Lighting Science & Technology had CN¥47.8m of debt, up from CN¥9.60m a year ago. Click the image for more detail. However, it does have CN¥925.5m in cash offsetting this, leading to net cash of CN¥877.7m.

How Strong Is Ocean's King Lighting Science & Technology's Balance Sheet?

The latest balance sheet data shows that Ocean's King Lighting Science & Technology had liabilities of CN¥645.7m due within a year, and liabilities of CN¥19.4m falling due after that. Offsetting this, it had CN¥925.5m in cash and CN¥1.30b in receivables that were due within 12 months. So it actually has CN¥1.56b more liquid assets than total liabilities.

This surplus strongly suggests that Ocean's King Lighting Science & Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Ocean's King Lighting Science & Technology has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Ocean's King Lighting Science & Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ocean's King Lighting Science & Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Ocean's King Lighting Science & Technology?

Although Ocean's King Lighting Science & Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥6.4m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Ocean's King Lighting Science & Technology you should be aware of, and 1 of them doesn't sit too well with us.

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.

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.