Is Shenzhen InfoGem Technologies (SZSE:300085) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Shenzhen InfoGem Technologies Co., Ltd. (SZSE:300085) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shenzhen InfoGem Technologies

What Is Shenzhen InfoGem Technologies's Debt?

As you can see below, Shenzhen InfoGem Technologies had CN¥318.2m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥325.9m in cash, so it actually has CN¥7.67m net cash.

How Strong Is Shenzhen InfoGem Technologies' Balance Sheet?

We can see from the most recent balance sheet that Shenzhen InfoGem Technologies had liabilities of CN¥590.6m falling due within a year, and liabilities of CN¥10.4m due beyond that. Offsetting this, it had CN¥325.9m in cash and CN¥249.0m in receivables that were due within 12 months. So its liabilities total CN¥26.2m more than the combination of its cash and short-term receivables.

Having regard to Shenzhen InfoGem Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.77b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shenzhen InfoGem Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen InfoGem Technologies 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.

In the last year Shenzhen InfoGem Technologies had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥952m. We would much prefer see growth.

So How Risky Is Shenzhen InfoGem Technologies?

While Shenzhen InfoGem Technologies lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥58m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shenzhen InfoGem Technologies is showing 1 warning sign in our investment analysis , you should know about...

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.