Shenzhen Baoming TechnologyLtd (SZSE:002992) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Shenzhen Baoming Technology Co.,Ltd. (SZSE:002992) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Baoming TechnologyLtd

How Much Debt Does Shenzhen Baoming TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shenzhen Baoming TechnologyLtd had CN¥654.9m of debt, an increase on CN¥308.5m, over one year. However, because it has a cash reserve of CN¥336.9m, its net debt is less, at about CN¥318.0m.

How Healthy Is Shenzhen Baoming TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Shenzhen Baoming TechnologyLtd had liabilities of CN¥1.46b due within 12 months, and liabilities of CN¥269.5m due beyond 12 months. Offsetting this, it had CN¥336.9m in cash and CN¥711.0m in receivables that were due within 12 months. So its liabilities total CN¥681.9m more than the combination of its cash and short-term receivables.

Of course, Shenzhen Baoming TechnologyLtd has a market capitalization of CN¥9.17b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Baoming TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shenzhen Baoming TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to CN¥1.2b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Shenzhen Baoming TechnologyLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥129m 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. 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¥233m in negative free cash flow over the last twelve months. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shenzhen Baoming TechnologyLtd has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.