Does Shen Zhen Australis Electronic TechnologyLtd (SZSE:300940) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Shen Zhen Australis Electronic Technology Co.,Ltd. (SZSE:300940) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shen Zhen Australis Electronic TechnologyLtd

How Much Debt Does Shen Zhen Australis Electronic TechnologyLtd Carry?

As you can see below, Shen Zhen Australis Electronic TechnologyLtd had CN¥11.0m of debt at September 2024, down from CN¥30.0m a year prior. However, it does have CN¥122.1m in cash offsetting this, leading to net cash of CN¥111.1m.

How Healthy Is Shen Zhen Australis Electronic TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shen Zhen Australis Electronic TechnologyLtd had liabilities of CN¥250.9m due within 12 months and liabilities of CN¥86.0m due beyond that. Offsetting these obligations, it had cash of CN¥122.1m as well as receivables valued at CN¥250.8m due within 12 months. So it actually has CN¥36.0m more liquid assets than total liabilities.

Having regard to Shen Zhen Australis Electronic TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥3.94b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shen Zhen Australis Electronic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shen Zhen Australis Electronic TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shen Zhen Australis Electronic TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥325m, which is a fall of 30%. To be frank that doesn't bode well.

So How Risky Is Shen Zhen Australis Electronic TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Shen Zhen Australis Electronic TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥26m and booked a CN¥206m accounting loss. But the saving grace is the CN¥111.1m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shen Zhen Australis Electronic TechnologyLtd .

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.