Shenzhen Topway Video Communication (SZSE:002238) Has Debt But No Earnings; Should You Worry?

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.' 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 note that Shenzhen Topway Video Communication Co., Ltd (SZSE:002238) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shenzhen Topway Video Communication's Net Debt?

As you can see below, at the end of September 2024, Shenzhen Topway Video Communication had CN¥324.0m of debt, up from CN¥250.2m a year ago. Click the image for more detail. But it also has CN¥1.13b in cash to offset that, meaning it has CN¥805.1m net cash.

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

We can see from the most recent balance sheet that Shenzhen Topway Video Communication had liabilities of CN¥1.49b falling due within a year, and liabilities of CN¥317.9m due beyond that. On the other hand, it had cash of CN¥1.13b and CN¥311.4m worth of receivables due within a year. So it has liabilities totalling CN¥371.5m more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen Topway Video Communication shares are worth a total of CN¥7.23b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shenzhen Topway Video Communication also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Topway Video Communication will need earnings to service that debt. 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 Shenzhen Topway Video Communication

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. We usually like to see faster growth from unprofitable companies, but each to their own.

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 taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For instance, we've identified 5 warning signs for Shenzhen Topway Video Communication (1 is significant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.