Is Nanjing Sciyon Wisdom Technology Group (SZSE:002380) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Nanjing Sciyon Wisdom Technology Group Co., Ltd. (SZSE:002380) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nanjing Sciyon Wisdom Technology Group

How Much Debt Does Nanjing Sciyon Wisdom Technology Group Carry?

You can click the graphic below for the historical numbers, but it shows that Nanjing Sciyon Wisdom Technology Group had CN¥17.6m of debt in September 2023, down from CN¥54.0m, one year before. However, its balance sheet shows it holds CN¥559.4m in cash, so it actually has CN¥541.8m net cash.

A Look At Nanjing Sciyon Wisdom Technology Group's Liabilities

According to the last reported balance sheet, Nanjing Sciyon Wisdom Technology Group had liabilities of CN¥1.24b due within 12 months, and liabilities of CN¥44.9m due beyond 12 months. On the other hand, it had cash of CN¥559.4m and CN¥991.1m worth of receivables due within a year. So it can boast CN¥264.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Nanjing Sciyon Wisdom Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nanjing Sciyon Wisdom Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Nanjing Sciyon Wisdom Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Nanjing Sciyon Wisdom Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 3.2%. That's not what we would hope to see.

So How Risky Is Nanjing Sciyon Wisdom Technology Group?

Although Nanjing Sciyon Wisdom Technology Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥108m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 1 warning sign with Nanjing Sciyon Wisdom Technology Group , and understanding them should be part of your investment process.

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.