Is Shenzhen Sunwin Intelligent (SZSE:300044) A Risky Investment?

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.' 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. We note that Shenzhen Sunwin Intelligent Co., Ltd. (SZSE:300044) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen Sunwin Intelligent

What Is Shenzhen Sunwin Intelligent's Net Debt?

As you can see below, Shenzhen Sunwin Intelligent had CN¥418.7m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥53.9m in cash, and so its net debt is CN¥364.8m.

How Strong Is Shenzhen Sunwin Intelligent's Balance Sheet?

According to the last reported balance sheet, Shenzhen Sunwin Intelligent had liabilities of CN¥540.2m due within 12 months, and liabilities of CN¥380.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥53.9m as well as receivables valued at CN¥794.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥72.4m.

Having regard to Shenzhen Sunwin Intelligent's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.19b company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Sunwin Intelligent will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shenzhen Sunwin Intelligent made a loss at the EBIT level, and saw its revenue drop to CN¥285m, which is a fall of 40%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shenzhen Sunwin Intelligent's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥110m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥196m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Shenzhen Sunwin Intelligent that you should be aware of before investing here.

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.