Is Guangdong Seneasy Intelligent TechnologyLtd (SZSE:301578) Using Too Much Debt?

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, Guangdong Seneasy Intelligent Technology Co.,Ltd. (SZSE:301578) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Guangdong Seneasy Intelligent TechnologyLtd

What Is Guangdong Seneasy Intelligent TechnologyLtd's Net Debt?

As you can see below, at the end of June 2024, Guangdong Seneasy Intelligent TechnologyLtd had CN¥112.7m of debt, up from CN¥51.5m a year ago. Click the image for more detail. However, it does have CN¥458.9m in cash offsetting this, leading to net cash of CN¥346.2m.

A Look At Guangdong Seneasy Intelligent TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangdong Seneasy Intelligent TechnologyLtd had liabilities of CN¥318.8m due within 12 months and liabilities of CN¥116.1m due beyond that. On the other hand, it had cash of CN¥458.9m and CN¥264.7m worth of receivables due within a year. So it actually has CN¥288.7m more liquid assets than total liabilities.

This surplus suggests that Guangdong Seneasy Intelligent TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guangdong Seneasy Intelligent TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Guangdong Seneasy Intelligent TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 27% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangdong Seneasy Intelligent 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Guangdong Seneasy Intelligent TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Guangdong Seneasy Intelligent TechnologyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Seneasy Intelligent TechnologyLtd has CN¥346.2m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Guangdong Seneasy Intelligent TechnologyLtd's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Guangdong Seneasy Intelligent TechnologyLtd (2 make us uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.