CPT Technology (Group)Ltd (SZSE:000536) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 CPT Technology (Group) Co.,Ltd (SZSE:000536) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CPT Technology (Group)Ltd

What Is CPT Technology (Group)Ltd's Net Debt?

The chart below, which you can click on for greater detail, shows that CPT Technology (Group)Ltd had CN¥3.57b in debt in March 2024; about the same as the year before. However, it also had CN¥1.04b in cash, and so its net debt is CN¥2.54b.

A Look At CPT Technology (Group)Ltd's Liabilities

According to the last reported balance sheet, CPT Technology (Group)Ltd had liabilities of CN¥3.82b due within 12 months, and liabilities of CN¥1.23b due beyond 12 months. Offsetting this, it had CN¥1.04b in cash and CN¥215.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.80b.

This deficit isn't so bad because CPT Technology (Group)Ltd is worth CN¥6.36b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CPT Technology (Group)Ltd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CPT Technology (Group)Ltd had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥1.6b. We would much prefer see growth.

Caveat Emptor

Not only did CPT Technology (Group)Ltd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥1.3b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥370m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like CPT Technology (Group)Ltd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.