Here's Why Shenzhen Dynanonic (SZSE:300769) Can Afford Some 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 Shenzhen Dynanonic

What Is Shenzhen Dynanonic's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Dynanonic had debt of CN¥5.91b at the end of March 2024, a reduction from CN¥9.75b over a year. However, because it has a cash reserve of CN¥2.95b, its net debt is less, at about CN¥2.95b.

How Strong Is Shenzhen Dynanonic's Balance Sheet?

According to the last reported balance sheet, Shenzhen Dynanonic had liabilities of CN¥7.30b due within 12 months, and liabilities of CN¥3.66b due beyond 12 months. On the other hand, it had cash of CN¥2.95b and CN¥3.41b worth of receivables due within a year. So its liabilities total CN¥4.60b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥6.86b, so it does suggest shareholders should keep an eye on Shenzhen Dynanonic's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Dynanonic's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Dynanonic had a loss before interest and tax, and actually shrunk its revenue by 42%, to CN¥14b. That makes us nervous, to say the least.

Caveat Emptor

While Shenzhen Dynanonic's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥1.9b 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. For example, we would not want to see a repeat of last year's loss of CN¥1.1b. So in short it's a really risky stock. For riskier companies like Shenzhen Dynanonic I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.