Is Qi An Xin Technology Group (SHSE:688561) Using Too Much Debt?

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. As with many other companies Qi An Xin Technology Group Inc. (SHSE:688561) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Qi An Xin Technology Group

What Is Qi An Xin Technology Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Qi An Xin Technology Group had CN¥1.46b of debt, an increase on CN¥705.6m, over one year. However, it also had CN¥656.3m in cash, and so its net debt is CN¥808.3m.

How Strong Is Qi An Xin Technology Group's Balance Sheet?

The latest balance sheet data shows that Qi An Xin Technology Group had liabilities of CN¥4.75b due within a year, and liabilities of CN¥543.7m falling due after that. On the other hand, it had cash of CN¥656.3m and CN¥6.85b worth of receivables due within a year. So it can boast CN¥2.21b more liquid assets than total liabilities.

This short term liquidity is a sign that Qi An Xin Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Qi An Xin Technology Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Qi An Xin Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 6.2%, to CN¥6.7b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Qi An Xin Technology Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥349m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. For example - Qi An Xin Technology Group has 1 warning sign 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.