These 4 Measures Indicate That Sino Wealth Electronic (SZSE:300327) Is Using Debt Extensively

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.' 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. We can see that Sino Wealth Electronic Ltd. (SZSE:300327) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sino Wealth Electronic

How Much Debt Does Sino Wealth Electronic Carry?

As you can see below, Sino Wealth Electronic had CN¥20.0m of debt at March 2024, down from CN¥77.6m a year prior. However, it does have CN¥403.3m in cash offsetting this, leading to net cash of CN¥383.3m.

How Strong Is Sino Wealth Electronic's Balance Sheet?

The latest balance sheet data shows that Sino Wealth Electronic had liabilities of CN¥332.0m due within a year, and liabilities of CN¥3.29m falling due after that. Offsetting this, it had CN¥403.3m in cash and CN¥213.7m in receivables that were due within 12 months. So it can boast CN¥281.7m 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.

The modesty of its debt load may become crucial for Sino Wealth Electronic if management cannot prevent a repeat of the 95% 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. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sino Wealth Electronic may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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¥383.3m, 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sino Wealth Electronic 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.

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