Chipsea Technologies (shenzhen) (SHSE:688595) 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.' 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. As with many other companies Chipsea Technologies (shenzhen) Corp. (SHSE:688595) makes use of debt. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for Chipsea Technologies (shenzhen)

How Much Debt Does Chipsea Technologies (shenzhen) Carry?

You can click the graphic below for the historical numbers, but it shows that Chipsea Technologies (shenzhen) had CN¥404.4m of debt in March 2024, down from CN¥473.9m, one year before. But it also has CN¥451.4m in cash to offset that, meaning it has CN¥47.0m net cash.

How Healthy Is Chipsea Technologies (shenzhen)'s Balance Sheet?

We can see from the most recent balance sheet that Chipsea Technologies (shenzhen) had liabilities of CN¥155.7m falling due within a year, and liabilities of CN¥390.3m due beyond that. Offsetting these obligations, it had cash of CN¥451.4m as well as receivables valued at CN¥180.6m due within 12 months. So it actually has CN¥86.0m more liquid assets than total liabilities.

This surplus suggests that Chipsea Technologies (shenzhen) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chipsea Technologies (shenzhen) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Chipsea Technologies (shenzhen)'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 Chipsea Technologies (shenzhen)'s revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Chipsea Technologies (shenzhen)?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Chipsea Technologies (shenzhen) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥64m of cash and made a loss of CN¥130m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥47.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Chipsea Technologies (shenzhen) that 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.

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