Here's Why Chongqing Millison Technologies (SZSE:301307) Can Afford Some Debt

Warren Buffett famously said, '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. Importantly, Chongqing Millison Technologies INC. (SZSE:301307) does carry debt. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Chongqing Millison Technologies's 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. However, it does have CN¥563.9m in cash offsetting this, leading to net debt of about CN¥1.08b.

A Look At Chongqing Millison Technologies' Liabilities

According to the last reported balance sheet, Chongqing Millison Technologies had liabilities of CN¥2.44b due within 12 months, and liabilities of CN¥951.3m due beyond 12 months. Offsetting this, it had CN¥563.9m in cash and CN¥1.19b in receivables that were due within 12 months. So its liabilities total CN¥1.64b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Chongqing Millison Technologies is worth CN¥4.64b, 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. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

View our latest analysis for Chongqing Millison Technologies

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

Over the last twelve months Chongqing Millison Technologies produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥60m. 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¥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. Case in point: We've spotted 1 warning sign for Chongqing Millison Technologies 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.