Kunshan Kersen Science & TechnologyLtd (SHSE:603626) Is Carrying A Fair Bit Of Debt

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.' 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. As with many other companies Kunshan Kersen Science & Technology Co.,Ltd. (SHSE:603626) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kunshan Kersen Science & TechnologyLtd

What Is Kunshan Kersen Science & TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Kunshan Kersen Science & TechnologyLtd had debt of CN¥1.50b, up from CN¥1.33b in one year. However, because it has a cash reserve of CN¥344.7m, its net debt is less, at about CN¥1.16b.

How Strong Is Kunshan Kersen Science & TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Kunshan Kersen Science & TechnologyLtd had liabilities of CN¥2.32b falling due within a year, and liabilities of CN¥780.6m due beyond that. Offsetting this, it had CN¥344.7m in cash and CN¥1.44b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.32b.

This deficit isn't so bad because Kunshan Kersen Science & TechnologyLtd is worth CN¥4.90b, and thus could probably raise enough capital to shore up 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 Kunshan Kersen Science & TechnologyLtd'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, Kunshan Kersen Science & TechnologyLtd reported revenue of CN¥3.3b, which is a gain of 16%, 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 Kunshan Kersen Science & TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥286m 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. Another cause for caution is that is bled CN¥3.2m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Kunshan Kersen Science & TechnologyLtd (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.