Sino Wealth Electronic (SZSE:300327) Takes On Some Risk With Its Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Sino Wealth Electronic Ltd. (SZSE:300327) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sino Wealth Electronic

What Is Sino Wealth Electronic's Net Debt?

As you can see below, Sino Wealth Electronic had CN¥22.6m of debt at September 2023, down from CN¥51.8m a year prior. But on the other hand it also has CN¥405.7m in cash, leading to a CN¥383.1m net cash position.

How Strong Is Sino Wealth Electronic's Balance Sheet?

The latest balance sheet data shows that Sino Wealth Electronic had liabilities of CN¥409.5m due within a year, and liabilities of CN¥6.97m falling due after that. On the other hand, it had cash of CN¥405.7m and CN¥215.5m worth of receivables due within a year. So it can boast CN¥204.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Sino Wealth Electronic could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

It is just as well that Sino Wealth Electronic's load is not too heavy, because its EBIT was down 78% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Sino Wealth Electronic saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sino Wealth Electronic has net cash of CN¥383.1m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Sino Wealth Electronic's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Sino Wealth Electronic has 3 warning signs (and 2 which can't be ignored) we think you should know about.

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.