Is Sunfly Intelligent Technology (SZSE:300423) Using Debt In A Risky Way?

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. As with many other companies Sunfly Intelligent Technology Co., LTD (SZSE:300423) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sunfly Intelligent Technology

What Is Sunfly Intelligent Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sunfly Intelligent Technology had CN¥171.6m of debt, an increase on CN¥105.6m, over one year. But it also has CN¥352.3m in cash to offset that, meaning it has CN¥180.7m net cash.

A Look At Sunfly Intelligent Technology's Liabilities

The latest balance sheet data shows that Sunfly Intelligent Technology had liabilities of CN¥1.86b due within a year, and liabilities of CN¥28.9m falling due after that. Offsetting this, it had CN¥352.3m in cash and CN¥1.29b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥245.3m.

Of course, Sunfly Intelligent Technology has a market capitalization of CN¥3.75b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sunfly Intelligent Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sunfly Intelligent 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, Sunfly Intelligent Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 42%. That makes us nervous, to say the least.

So How Risky Is Sunfly Intelligent Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Sunfly Intelligent Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥121m and booked a CN¥1.2b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥180.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sunfly Intelligent Technology is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.