Shenzhen Baoming TechnologyLtd (SZSE:002992) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Baoming Technology Co.,Ltd. (SZSE:002992) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shenzhen Baoming TechnologyLtd's Net Debt?

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 Healthy Is Shenzhen Baoming TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Baoming TechnologyLtd had liabilities of CN¥1.34b due within 12 months 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 outweigh the sum of its cash and (near-term) receivables by CN¥647.6m.

Since publicly traded Shenzhen Baoming TechnologyLtd shares are worth a total of CN¥13.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Check out our latest analysis for Shenzhen Baoming TechnologyLtd

In the last year Shenzhen Baoming TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to CN¥1.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Shenzhen Baoming TechnologyLtd still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥78m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Shenzhen Baoming TechnologyLtd you should be aware of, and 1 of them is a bit concerning.

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.