Shenyang Blue Silver Industry Automation Equipment (SZSE:300293) Is Making Moderate Use Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shenyang Blue Silver Industry Automation Equipment Co., Ltd (SZSE:300293) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenyang Blue Silver Industry Automation Equipment

What Is Shenyang Blue Silver Industry Automation Equipment's Net Debt?

The image below, which you can click on for greater detail, shows that Shenyang Blue Silver Industry Automation Equipment had debt of CN¥521.3m at the end of September 2023, a reduction from CN¥870.9m over a year. However, it does have CN¥166.9m in cash offsetting this, leading to net debt of about CN¥354.4m.

How Healthy Is Shenyang Blue Silver Industry Automation Equipment's Balance Sheet?

The latest balance sheet data shows that Shenyang Blue Silver Industry Automation Equipment had liabilities of CN¥911.9m due within a year, and liabilities of CN¥336.5m falling due after that. Offsetting these obligations, it had cash of CN¥166.9m as well as receivables valued at CN¥518.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥562.7m.

Given Shenyang Blue Silver Industry Automation Equipment has a market capitalization of CN¥5.03b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenyang Blue Silver Industry Automation Equipment 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.

Over 12 months, Shenyang Blue Silver Industry Automation Equipment reported revenue of CN¥1.5b, which is a gain of 40%, 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.

Caveat Emptor

Even though Shenyang Blue Silver Industry Automation Equipment managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥50m. 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. However, it doesn't help that it burned through CN¥96m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Shenyang Blue Silver Industry Automation Equipment (2 are a bit concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.