Shenzhen InfoGem Technologies (SZSE:300085) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Shenzhen InfoGem Technologies Co., Ltd. (SZSE:300085) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen InfoGem Technologies

What Is Shenzhen InfoGem Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen InfoGem Technologies had CN¥277.8m of debt in September 2023, down from CN¥392.4m, one year before. However, because it has a cash reserve of CN¥266.5m, its net debt is less, at about CN¥11.3m.

How Healthy Is Shenzhen InfoGem Technologies' Balance Sheet?

We can see from the most recent balance sheet that Shenzhen InfoGem Technologies had liabilities of CN¥524.3m falling due within a year, and liabilities of CN¥10.6m due beyond that. On the other hand, it had cash of CN¥266.5m and CN¥295.9m worth of receivables due within a year. So it actually has CN¥27.4m more liquid assets than total liabilities.

This state of affairs indicates that Shenzhen InfoGem Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥8.23b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Shenzhen InfoGem Technologies has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Shenzhen InfoGem Technologies reported revenue of CN¥1.1b, which is a gain of 3.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Shenzhen InfoGem Technologies had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥50m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. 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 instance, we've identified 1 warning sign for Shenzhen InfoGem Technologies that you should be aware of.

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.