Shenzhen Minglida Precision Technology (SZSE:301268) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Shenzhen Minglida Precision Technology Co., Ltd. (SZSE:301268) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 Shenzhen Minglida Precision Technology

What Is Shenzhen Minglida Precision Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen Minglida Precision Technology had CN¥2.07b of debt, an increase on CN¥1.48b, over one year. On the flip side, it has CN¥1.47b in cash leading to net debt of about CN¥598.3m.

How Strong Is Shenzhen Minglida Precision Technology's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Minglida Precision Technology had liabilities of CN¥2.46b falling due within a year, and liabilities of CN¥1.24b due beyond that. Offsetting this, it had CN¥1.47b in cash and CN¥898.5m in receivables that were due within 12 months. So its liabilities total CN¥1.33b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shenzhen Minglida Precision Technology is worth CN¥6.27b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 it is Shenzhen Minglida Precision 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.

In the last year Shenzhen Minglida Precision Technology had a loss before interest and tax, and actually shrunk its revenue by 34%, to CN¥2.8b. To be frank that doesn't bode well.

Caveat Emptor

While Shenzhen Minglida Precision Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥29m at the EBIT level. 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. Another cause for caution is that is bled CN¥858m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Shenzhen Minglida Precision Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.