Here's Why Sino Geophysical (SZSE:300191) Can Afford Some 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.' 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. As with many other companies Sino Geophysical Co., Ltd (SZSE:300191) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sino Geophysical

What Is Sino Geophysical's Debt?

As you can see below, at the end of September 2024, Sino Geophysical had CN¥677.4m of debt, up from CN¥377.1m a year ago. Click the image for more detail. However, it also had CN¥401.0m in cash, and so its net debt is CN¥276.4m.

A Look At Sino Geophysical's Liabilities

According to the last reported balance sheet, Sino Geophysical had liabilities of CN¥847.4m due within 12 months, and liabilities of CN¥670.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥401.0m as well as receivables valued at CN¥38.5m due within 12 months. So it has liabilities totalling CN¥1.08b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Sino Geophysical has a market capitalization of CN¥4.45b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 you can't view debt in total isolation; since Sino Geophysical will need earnings to service that debt. 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 Sino Geophysical wasn't profitable at an EBIT level, but managed to grow its revenue by 9.5%, to CN¥500m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Sino Geophysical had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥44m 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¥572m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Sino Geophysical 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.