Is Xgimi TechnologyLtd (SHSE:688696) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Xgimi Technology Co.,Ltd. (SHSE:688696) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Xgimi TechnologyLtd

What Is Xgimi TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Xgimi TechnologyLtd had debt of CN¥570.0m, up from CN¥482.1m in one year. But on the other hand it also has CN¥2.64b in cash, leading to a CN¥2.07b net cash position.

How Strong Is Xgimi TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Xgimi TechnologyLtd had liabilities of CN¥1.25b due within 12 months, and liabilities of CN¥1.14b due beyond 12 months. Offsetting this, it had CN¥2.64b in cash and CN¥172.6m in receivables that were due within 12 months. So it actually has CN¥426.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Xgimi TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xgimi TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xgimi TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Xgimi TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥3.5b. We would much prefer see growth.

So How Risky Is Xgimi TechnologyLtd?

Although Xgimi TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥83m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For instance, we've identified 2 warning signs for Xgimi TechnologyLtd that you should be aware of.

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.