Would Shenzhen Silver Basis Technology (SZSE:002786) Be Better Off With Less 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. We can see that Shenzhen Silver Basis Technology Co., Ltd. (SZSE:002786) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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¥768.1m at the end of September 2024, a reduction from CN¥890.9m over a year. However, because it has a cash reserve of CN¥97.8m, its net debt is less, at about CN¥670.3m.

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

The latest balance sheet data shows that Shenzhen Silver Basis Technology had liabilities of CN¥2.88b due within a year, and liabilities of CN¥451.3m falling due after that. Offsetting these obligations, it had cash of CN¥97.8m as well as receivables valued at CN¥541.1m due within 12 months. So its liabilities total CN¥2.69b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Shenzhen Silver Basis Technology has a market capitalization of CN¥4.74b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shenzhen Silver Basis Technology had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to CN¥2.3b. That's not what we would hope to see.

Caveat Emptor

Importantly, Shenzhen Silver Basis Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥265m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥9.1m and the profit of CN¥260m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Shenzhen Silver Basis Technology you should be aware of.

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.