Health Check: How Prudently Does Addsino (SZSE:000547) Use 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.' 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. 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 Addsino

What Is Addsino's Net Debt?

As you can see below, at the end of September 2024, Addsino had CN¥997.9m of debt, up from CN¥895.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.34b in cash, so it actually has CN¥338.7m net cash.

How Strong Is Addsino's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Addsino had liabilities of CN¥4.40b due within 12 months and liabilities of CN¥469.2m due beyond that. Offsetting this, it had CN¥1.34b in cash and CN¥2.80b in receivables that were due within 12 months. So its liabilities total CN¥734.5m more than the combination of its cash and short-term receivables.

Since publicly traded Addsino shares are worth a total of CN¥11.1b, 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! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Addsino made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 44%. To be frank that doesn't bode well.

So How Risky Is Addsino?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Addsino lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥341m and booked a CN¥2.0b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥338.7m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Addsino that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.