Luxin Venture Capital Group (SHSE:600783) Is Carrying A Fair Bit Of Debt

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 Luxin Venture Capital Group Co., Ltd. (SHSE:600783) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Luxin Venture Capital Group

What Is Luxin Venture Capital Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Luxin Venture Capital Group had CN¥3.49b of debt, an increase on CN¥3.23b, over one year. On the flip side, it has CN¥1.53b in cash leading to net debt of about CN¥1.96b.

How Strong Is Luxin Venture Capital Group's Balance Sheet?

We can see from the most recent balance sheet that Luxin Venture Capital Group had liabilities of CN¥167.9m falling due within a year, and liabilities of CN¥3.99b due beyond that. Offsetting these obligations, it had cash of CN¥1.53b as well as receivables valued at CN¥58.2m due within 12 months. So it has liabilities totalling CN¥2.57b more than its cash and near-term receivables, combined.

Luxin Venture Capital Group has a market capitalization of CN¥8.62b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Luxin Venture Capital Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Luxin Venture Capital Group made a loss at the EBIT level, and saw its revenue drop to CN¥82m, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Luxin Venture Capital Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥93m. 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¥108m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Luxin Venture Capital Group (including 1 which is a bit unpleasant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.