Is Nanjing Sciyon Wisdom Technology Group (SZSE:002380) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Nanjing Sciyon Wisdom Technology Group Co., Ltd. (SZSE:002380) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nanjing Sciyon Wisdom Technology Group

What Is Nanjing Sciyon Wisdom Technology Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Nanjing Sciyon Wisdom Technology Group had debt of CN¥33.8m, up from CN¥8.86m in one year. However, its balance sheet shows it holds CN¥739.1m in cash, so it actually has CN¥705.3m net cash.

How Strong Is Nanjing Sciyon Wisdom Technology Group's Balance Sheet?

We can see from the most recent balance sheet that Nanjing Sciyon Wisdom Technology Group had liabilities of CN¥1.32b falling due within a year, and liabilities of CN¥49.5m due beyond that. Offsetting these obligations, it had cash of CN¥739.1m as well as receivables valued at CN¥1.05b due within 12 months. So it actually has CN¥414.1m more liquid assets than total liabilities.

This surplus suggests that Nanjing Sciyon Wisdom Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanjing Sciyon Wisdom Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Nanjing Sciyon Wisdom Technology Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥146m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nanjing Sciyon Wisdom Technology Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nanjing Sciyon Wisdom Technology Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Nanjing Sciyon Wisdom Technology Group produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nanjing Sciyon Wisdom Technology Group has CN¥705.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥99m, being 68% of its EBIT. So we don't think Nanjing Sciyon Wisdom Technology Group's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Nanjing Sciyon Wisdom Technology Group you should be aware of, and 1 of them is significant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.