Is Shanghai Hi-Tech Control System (SZSE:002184) Weighed On By Its Debt Load?

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.' 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. We can see that Shanghai Hi-Tech Control System Co., Ltd (SZSE:002184) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanghai Hi-Tech Control System

What Is Shanghai Hi-Tech Control System's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shanghai Hi-Tech Control System had debt of CN¥415.0m, up from CN¥227.7m in one year. However, its balance sheet shows it holds CN¥538.4m in cash, so it actually has CN¥123.4m net cash.

A Look At Shanghai Hi-Tech Control System's Liabilities

According to the last reported balance sheet, Shanghai Hi-Tech Control System had liabilities of CN¥2.02b due within 12 months, and liabilities of CN¥104.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥538.4m as well as receivables valued at CN¥1.52b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥70.7m.

Having regard to Shanghai Hi-Tech Control System'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¥3.92b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Shanghai Hi-Tech Control System 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 Shanghai Hi-Tech Control System's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shanghai Hi-Tech Control System made a loss at the EBIT level, and saw its revenue drop to CN¥2.7b, which is a fall of 21%. That makes us nervous, to say the least.

So How Risky Is Shanghai Hi-Tech Control System?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Shanghai Hi-Tech Control System 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¥123m and booked a CN¥91m accounting loss. Given it only has net cash of CN¥123.4m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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, we've discovered 1 warning sign for Shanghai Hi-Tech Control System that you should be aware of before investing here.

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.

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

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.