Is Shenzhen Topway Video Communication (SZSE:002238) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Shenzhen Topway Video Communication Co., Ltd (SZSE:002238) 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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenzhen Topway Video Communication

What Is Shenzhen Topway Video Communication's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen Topway Video Communication had CN¥324.0m of debt, an increase on CN¥250.2m, over one year. However, its balance sheet shows it holds CN¥1.13b in cash, so it actually has CN¥805.1m net cash.

How Strong Is Shenzhen Topway Video Communication's Balance Sheet?

The latest balance sheet data shows that Shenzhen Topway Video Communication had liabilities of CN¥1.49b due within a year, and liabilities of CN¥317.9m falling due after that. On the other hand, it had cash of CN¥1.13b and CN¥311.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥371.5m.

Of course, Shenzhen Topway Video Communication has a market capitalization of CN¥7.89b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shenzhen Topway Video Communication boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Topway Video Communication'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, Shenzhen Topway Video Communication reported revenue of CN¥1.4b, which is a gain of 3.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shenzhen Topway Video Communication?

While Shenzhen Topway Video Communication lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥61m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 4 warning signs for Shenzhen Topway Video Communication you should be aware of, and 1 of them shouldn't be ignored.

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.