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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Luxin Venture Capital Group Co., Ltd. (SHSE:600783) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Luxin Venture Capital Group

What Is Luxin Venture Capital Group's Debt?

As you can see below, at the end of March 2024, Luxin Venture Capital Group had CN¥3.49b of debt, up from CN¥3.23b a year ago. Click the image for more detail. However, it also had CN¥1.53b in cash, and so its net debt is 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. On the other hand, it had cash of CN¥1.53b and CN¥58.2m worth of receivables due within a year. So it has liabilities totalling CN¥2.57b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Luxin Venture Capital Group is worth CN¥7.24b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Luxin Venture Capital Group's earnings that will influence how the balance sheet holds up in the future. 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.

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%. To be frank that doesn't bode well.

Caveat Emptor

While Luxin Venture Capital Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥93m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥108m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Luxin Venture Capital Group you should be aware of, and 2 of them make us uncomfortable.

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.