Chongqing Millison Technologies (SZSE:301307) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Chongqing Millison Technologies INC. (SZSE:301307) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Chongqing Millison Technologies

What Is Chongqing Millison Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Chongqing Millison Technologies had debt of CN¥1.64b, up from CN¥693.4m in one year. On the flip side, it has CN¥563.9m in cash leading to net debt of about CN¥1.08b.

A Look At Chongqing Millison Technologies' Liabilities

We can see from the most recent balance sheet that Chongqing Millison Technologies had liabilities of CN¥2.44b falling due within a year, and liabilities of CN¥951.3m due beyond that. Offsetting these obligations, it had cash of CN¥563.9m as well as receivables valued at CN¥1.19b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.64b.

While this might seem like a lot, it is not so bad since Chongqing Millison Technologies has a market capitalization of CN¥4.73b, 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 it is Chongqing Millison Technologies'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.

In the last year Chongqing Millison Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 4.3%, to CN¥3.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Chongqing Millison Technologies had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥60m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥704m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Chongqing Millison Technologies is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.