Does Shenzhen Baoming TechnologyLtd (SZSE:002992) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Shenzhen Baoming Technology Co.,Ltd. (SZSE:002992) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Shenzhen Baoming TechnologyLtd

How Much Debt Does Shenzhen Baoming TechnologyLtd Carry?

The chart below, which you can click on for greater detail, shows that Shenzhen Baoming TechnologyLtd had CN¥676.1m in debt in September 2024; about the same as the year before. On the flip side, it has CN¥240.4m in cash leading to net debt of about CN¥435.7m.

How Strong Is Shenzhen Baoming TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Baoming TechnologyLtd had liabilities of CN¥1.34b falling due within a year, and liabilities of CN¥215.0m due beyond that. Offsetting this, it had CN¥240.4m in cash and CN¥669.6m in receivables that were due within 12 months. So its liabilities total CN¥647.6m more than the combination of its cash and short-term receivables.

Given Shenzhen Baoming TechnologyLtd has a market capitalization of CN¥11.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Baoming TechnologyLtd'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.

Over 12 months, Shenzhen Baoming TechnologyLtd reported revenue of CN¥1.6b, which is a gain of 42%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Shenzhen Baoming TechnologyLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥78m 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. However, it doesn't help that it burned through CN¥96m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shenzhen Baoming TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.