Is Allwinnertech TechnologyLtd (SZSE:300458) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Allwinnertech Technology Co.,Ltd. (SZSE:300458) 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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Allwinnertech TechnologyLtd

What Is Allwinnertech TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Allwinnertech TechnologyLtd had debt of CN¥270.8m, up from CN¥150.0m in one year. However, its balance sheet shows it holds CN¥1.98b in cash, so it actually has CN¥1.71b net cash.

How Healthy Is Allwinnertech TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Allwinnertech TechnologyLtd had liabilities of CN¥558.4m falling due within a year, and liabilities of CN¥60.9m due beyond that. Offsetting this, it had CN¥1.98b in cash and CN¥47.2m in receivables that were due within 12 months. So it actually has CN¥1.41b more liquid assets than total liabilities.

This excess liquidity suggests that Allwinnertech TechnologyLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Allwinnertech TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Allwinnertech TechnologyLtd'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.

In the last year Allwinnertech TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to CN¥1.8b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Allwinnertech TechnologyLtd?

Although Allwinnertech TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥114m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 38% is a good sign. We'd see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Allwinnertech TechnologyLtd has 2 warning signs we think you should be aware of.

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.