Does Shenzhen Dynanonic (SZSE:300769) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shenzhen Dynanonic Co., Ltd (SZSE:300769) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shenzhen Dynanonic

How Much Debt Does Shenzhen Dynanonic Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Dynanonic had debt of CN¥5.39b at the end of September 2024, a reduction from CN¥8.33b over a year. However, because it has a cash reserve of CN¥3.02b, its net debt is less, at about CN¥2.36b.

How Strong Is Shenzhen Dynanonic's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Dynanonic had liabilities of CN¥8.82b falling due within a year, and liabilities of CN¥3.00b due beyond that. Offsetting these obligations, it had cash of CN¥3.02b as well as receivables valued at CN¥3.66b due within 12 months. So its liabilities total CN¥5.13b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shenzhen Dynanonic is worth CN¥13.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Dynanonic can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shenzhen Dynanonic made a loss at the EBIT level, and saw its revenue drop to CN¥9.2b, which is a fall of 59%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shenzhen Dynanonic's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥2.1b at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥1.5b. 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 example - Shenzhen Dynanonic has 1 warning sign we think 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.