Health Check: How Prudently Does Sino Wealth Electronic (SZSE:300327) Use 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sino Wealth Electronic Ltd. (SZSE:300327) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Sino Wealth Electronic

What Is Sino Wealth Electronic's Net Debt?

As you can see below, at the end of June 2024, Sino Wealth Electronic had CN¥60.3m of debt, up from CN¥30.1m a year ago. Click the image for more detail. But it also has CN¥413.3m in cash to offset that, meaning it has CN¥353.1m net cash.

How Strong Is Sino Wealth Electronic's Balance Sheet?

According to the last reported balance sheet, Sino Wealth Electronic had liabilities of CN¥355.2m due within 12 months, and liabilities of CN¥3.05m due beyond 12 months. Offsetting this, it had CN¥413.3m in cash and CN¥278.0m in receivables that were due within 12 months. So it can boast CN¥333.1m 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. Simply put, the fact that Sino Wealth Electronic has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sino Wealth Electronic 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 Sino Wealth Electronic's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Sino Wealth Electronic?

While Sino Wealth Electronic lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥172m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Sino Wealth Electronic that you should be aware of before investing here.

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.