Health Check: How Prudently Does Addsino (SZSE:000547) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Addsino Co., Ltd. (SZSE:000547) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Addsino

What Is Addsino's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Addsino had debt of CN¥1.24b, up from CN¥788.9m in one year. But it also has CN¥1.42b in cash to offset that, meaning it has CN¥182.9m net cash.

A Look At Addsino's Liabilities

The latest balance sheet data shows that Addsino had liabilities of CN¥4.33b due within a year, and liabilities of CN¥490.5m falling due after that. On the other hand, it had cash of CN¥1.42b and CN¥3.00b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥396.9m.

Since publicly traded Addsino shares are worth a total of CN¥12.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Addsino boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Addsino'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.

In the last year Addsino had a loss before interest and tax, and actually shrunk its revenue by 45%, to CN¥1.6b. That makes us nervous, to say the least.

So How Risky Is Addsino?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Addsino had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥656m and booked a CN¥2.0b accounting loss. But at least it has CN¥182.9m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Addsino , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.