Does Shenzhen Silver Basis Technology (SZSE:002786) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shenzhen Silver Basis Technology Co., Ltd. (SZSE:002786) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Silver Basis Technology

How Much Debt Does Shenzhen Silver Basis Technology Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Silver Basis Technology had debt of CN¥890.9m at the end of September 2023, a reduction from CN¥1.49b over a year. However, because it has a cash reserve of CN¥95.8m, its net debt is less, at about CN¥795.1m.

How Strong Is Shenzhen Silver Basis Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Silver Basis Technology had liabilities of CN¥3.21b due within 12 months and liabilities of CN¥408.2m due beyond that. Offsetting these obligations, it had cash of CN¥95.8m as well as receivables valued at CN¥737.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.78b.

While this might seem like a lot, it is not so bad since Shenzhen Silver Basis Technology has a market capitalization of CN¥5.91b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Silver Basis Technology 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, Shenzhen Silver Basis Technology made a loss at the EBIT level, and saw its revenue drop to CN¥2.4b, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Shenzhen Silver Basis Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥194m. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥283m. So to be blunt we do think it is 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. Be aware that Shenzhen Silver Basis Technology is showing 2 warning signs in our investment analysis , 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.