Is Shandong Meichen Science & TechnologyLtd (SZSE:300237) 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. Importantly, Shandong Meichen Science & Technology Co.,Ltd. (SZSE:300237) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shandong Meichen Science & TechnologyLtd

What Is Shandong Meichen Science & TechnologyLtd's Debt?

As you can see below, Shandong Meichen Science & TechnologyLtd had CN¥4.06b of debt at September 2024, down from CN¥4.92b a year prior. And it doesn't have much cash, so its net debt is about the same.

A Look At Shandong Meichen Science & TechnologyLtd's Liabilities

According to the last reported balance sheet, Shandong Meichen Science & TechnologyLtd had liabilities of CN¥6.63b due within 12 months, and liabilities of CN¥1.11b due beyond 12 months. Offsetting these obligations, it had cash of CN¥80.5m as well as receivables valued at CN¥5.97b due within 12 months. So its liabilities total CN¥1.70b more than the combination of its cash and short-term receivables.

Shandong Meichen Science & TechnologyLtd has a market capitalization of CN¥3.73b, so it could very likely raise cash to ameliorate 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. 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 Shandong Meichen Science & TechnologyLtd 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.

In the last year Shandong Meichen Science & TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥1.7b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Shandong Meichen Science & TechnologyLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable CN¥679m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥18m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Shandong Meichen Science & TechnologyLtd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.