Does Sino Wealth Electronic (SZSE:300327) Have A Healthy Balance Sheet?

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 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. As with many other companies Sino Wealth Electronic Ltd. (SZSE:300327) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sino Wealth Electronic

How Much Debt Does Sino Wealth Electronic Carry?

As you can see below, at the end of September 2024, Sino Wealth Electronic had CN¥100.0m of debt, up from CN¥20.0m a year ago. Click the image for more detail. However, it does have CN¥447.4m in cash offsetting this, leading to net cash of CN¥347.4m.

How Strong Is Sino Wealth Electronic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sino Wealth Electronic had liabilities of CN¥425.6m due within 12 months and liabilities of CN¥5.27m due beyond that. On the other hand, it had cash of CN¥447.4m and CN¥223.4m worth of receivables due within a year. So it actually has CN¥239.9m more liquid assets than total liabilities.

This surplus suggests that Sino Wealth Electronic has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sino Wealth Electronic boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Sino Wealth Electronic if management cannot prevent a repeat of the 86% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sino Wealth Electronic's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sino Wealth Electronic has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Sino Wealth Electronic actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sino Wealth Electronic has CN¥347.4m in net cash and a decent-looking balance sheet. So while Sino Wealth Electronic does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 2 warning signs we've spotted with Sino Wealth Electronic .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.