Would Caihong Display DevicesLtd (SHSE:600707) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Caihong Display Devices Co.,Ltd. (SHSE:600707) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Caihong Display DevicesLtd

What Is Caihong Display DevicesLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Caihong Display DevicesLtd had CN¥15.7b of debt in September 2023, down from CN¥16.5b, one year before. On the flip side, it has CN¥7.55b in cash leading to net debt of about CN¥8.11b.

How Healthy Is Caihong Display DevicesLtd's Balance Sheet?

According to the last reported balance sheet, Caihong Display DevicesLtd had liabilities of CN¥9.01b due within 12 months, and liabilities of CN¥10.4b due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.55b as well as receivables valued at CN¥2.34b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.54b.

Caihong Display DevicesLtd has a market capitalization of CN¥24.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Caihong Display DevicesLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Caihong Display DevicesLtd reported revenue of CN¥11b, which is a gain of 18%, 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

Over the last twelve months Caihong Display DevicesLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥519m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥28m of cash over the last year. So suffice it to say we do consider the stock to be 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. We've identified 1 warning sign with Caihong Display DevicesLtd , and understanding them should be part of your investment process.

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.