Is Xgimi TechnologyLtd (SHSE:688696) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Xgimi Technology Co.,Ltd. (SHSE:688696) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 Xgimi TechnologyLtd had debt of CN¥559.9m at the end of September 2024, a reduction from CN¥627.5m over a year. But it also has CN¥2.52b in cash to offset that, meaning it has CN¥1.96b net cash.

How Healthy Is Xgimi TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Xgimi TechnologyLtd had liabilities of CN¥1.18b due within 12 months, and liabilities of CN¥1.12b due beyond 12 months. Offsetting this, it had CN¥2.52b in cash and CN¥233.7m in receivables that were due within 12 months. So it actually has CN¥451.8m more liquid assets than total liabilities.

This surplus suggests that Xgimi TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xgimi TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 9.2%, to CN¥3.4b. That's not what we would hope to see.

So How Risky Is Xgimi TechnologyLtd?

While Xgimi TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥342m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Xgimi TechnologyLtd 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.