Stock Analysis

SanFeng Intelligent Equipment Group (SZSE:300276) Has Debt But No Earnings; Should You Worry?

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SZSE:300276

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 SanFeng Intelligent Equipment Group Co., Ltd. (SZSE:300276) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SanFeng Intelligent Equipment Group

What Is SanFeng Intelligent Equipment Group's Net Debt?

As you can see below, at the end of September 2024, SanFeng Intelligent Equipment Group had CN¥193.1m of debt, up from CN¥184.9m a year ago. Click the image for more detail. However, it does have CN¥233.2m in cash offsetting this, leading to net cash of CN¥40.2m.

SZSE:300276 Debt to Equity History January 14th 2025

How Strong Is SanFeng Intelligent Equipment Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SanFeng Intelligent Equipment Group had liabilities of CN¥2.40b due within 12 months and liabilities of CN¥21.3m due beyond that. On the other hand, it had cash of CN¥233.2m and CN¥795.0m worth of receivables due within a year. So it has liabilities totalling CN¥1.39b more than its cash and near-term receivables, combined.

Given SanFeng Intelligent Equipment Group has a market capitalization of CN¥16.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, SanFeng Intelligent Equipment Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is SanFeng Intelligent Equipment Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SanFeng Intelligent Equipment Group reported revenue of CN¥2.0b, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is SanFeng Intelligent Equipment Group?

While SanFeng Intelligent Equipment Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥561k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that SanFeng Intelligent Equipment Group is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. 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 SanFeng Intelligent Equipment Group you should be aware of, and 1 of them is potentially serious.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.