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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Nanjing Sciyon Wisdom Technology Group Co., Ltd. (SZSE:002380) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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 September 2024 Nanjing Sciyon Wisdom Technology Group had debt of CN¥37.9m, up from CN¥17.6m in one year. But it also has CN¥806.0m in cash to offset that, meaning it has CN¥768.1m net cash.

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

According to the last reported balance sheet, Nanjing Sciyon Wisdom Technology Group had liabilities of CN¥1.43b due within 12 months, and liabilities of CN¥46.8m due beyond 12 months. On the other hand, it had cash of CN¥806.0m and CN¥1.12b worth of receivables due within a year. So it can boast CN¥456.4m 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!

It was also good to see that despite losing money on the EBIT line last year, Nanjing Sciyon Wisdom Technology Group turned things around in the last 12 months, delivering and EBIT of CN¥201m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nanjing Sciyon Wisdom 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nanjing Sciyon Wisdom Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent year, Nanjing Sciyon Wisdom Technology Group recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nanjing Sciyon Wisdom Technology Group has net cash of CN¥768.1m, as well as more liquid assets than liabilities. So is Nanjing Sciyon Wisdom Technology Group's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Nanjing Sciyon Wisdom Technology Group's earnings per share history for free.

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.