Shenzhen Intellifusion Technologies (SHSE:688343) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shenzhen Intellifusion Technologies Co., Ltd. (SHSE:688343) 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen Intellifusion Technologies

What Is Shenzhen Intellifusion Technologies's Net Debt?

As you can see below, at the end of March 2024, Shenzhen Intellifusion Technologies had CN¥50.0m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥3.06b in cash offsetting this, leading to net cash of CN¥3.01b.

How Strong Is Shenzhen Intellifusion Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Intellifusion Technologies had liabilities of CN¥525.1m due within 12 months and liabilities of CN¥50.1m due beyond that. On the other hand, it had cash of CN¥3.06b and CN¥541.7m worth of receivables due within a year. So it actually has CN¥3.02b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Intellifusion Technologies is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shenzhen Intellifusion Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Intellifusion Technologies 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 Shenzhen Intellifusion Technologies's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Shenzhen Intellifusion Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Shenzhen Intellifusion Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥1.3b of cash and made a loss of CN¥431m. But at least it has CN¥3.01b on the balance sheet to spend on growth, near-term. 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. For instance, we've identified 2 warning signs for Shenzhen Intellifusion Technologies (1 doesn't sit too well with us) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com