Is Shenyang Blue Silver Industry Automation Equipment (SZSE:300293) A Risky Investment?

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 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. As with many other companies Shenyang Blue Silver Industry Automation Equipment Co., Ltd (SZSE:300293) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenyang Blue Silver Industry Automation Equipment

How Much Debt Does Shenyang Blue Silver Industry Automation Equipment Carry?

The image below, which you can click on for greater detail, shows that Shenyang Blue Silver Industry Automation Equipment had debt of CN¥466.2m at the end of September 2024, a reduction from CN¥521.3m over a year. However, it does have CN¥132.4m in cash offsetting this, leading to net debt of about CN¥333.8m.

A Look At Shenyang Blue Silver Industry Automation Equipment's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenyang Blue Silver Industry Automation Equipment had liabilities of CN¥776.0m due within 12 months and liabilities of CN¥351.0m due beyond that. On the other hand, it had cash of CN¥132.4m and CN¥493.7m worth of receivables due within a year. So it has liabilities totalling CN¥500.9m more than its cash and near-term receivables, combined.

Given Shenyang Blue Silver Industry Automation Equipment has a market capitalization of CN¥9.14b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenyang Blue Silver Industry Automation Equipment 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, Shenyang Blue Silver Industry Automation Equipment made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

While Shenyang Blue Silver Industry Automation Equipment'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¥7.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥19m. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenyang Blue Silver Industry Automation Equipment you should know about.

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.