We Think Shenzhen Silver Basis Technology (SZSE:002786) Has A Fair Chunk Of Debt

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. As with many other companies Shenzhen Silver Basis Technology Co., Ltd. (SZSE:002786) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shenzhen Silver Basis Technology

How Much Debt Does Shenzhen Silver Basis Technology Carry?

As you can see below, at the end of March 2024, Shenzhen Silver Basis Technology had CN¥1.79b of debt, up from CN¥1.21b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥95.0m, its net debt is less, at about CN¥1.70b.

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

We can see from the most recent balance sheet that Shenzhen Silver Basis Technology had liabilities of CN¥3.00b falling due within a year, and liabilities of CN¥514.9m due beyond that. Offsetting these obligations, it had cash of CN¥95.0m as well as receivables valued at CN¥661.6m due within 12 months. So its liabilities total CN¥2.76b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥3.81b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Silver Basis Technology's earnings that will influence how the balance sheet holds up in the future. 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, Shenzhen Silver Basis Technology made a loss at the EBIT level, and saw its revenue drop to CN¥2.2b, 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. Indeed, it lost CN¥248m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥1.3m and the profit of CN¥267m. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Shenzhen Silver Basis Technology you should be aware of, and 1 of them shouldn't be ignored.

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.

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