Does Shenzhen Deren Electronic (SZSE:002055) Have A Healthy Balance Sheet?

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.' 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. Importantly, Shenzhen Deren Electronic Co., Ltd. (SZSE:002055) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Deren Electronic

What Is Shenzhen Deren Electronic's Net Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Deren Electronic had debt of CN¥735.5m at the end of March 2024, a reduction from CN¥811.6m over a year. However, it does have CN¥305.9m in cash offsetting this, leading to net debt of about CN¥429.6m.

How Healthy Is Shenzhen Deren Electronic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Deren Electronic had liabilities of CN¥3.39b due within 12 months and liabilities of CN¥1.83b due beyond that. Offsetting these obligations, it had cash of CN¥305.9m as well as receivables valued at CN¥2.42b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.49b.

While this might seem like a lot, it is not so bad since Shenzhen Deren Electronic has a market capitalization of CN¥4.33b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Deren Electronic's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shenzhen Deren Electronic had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥5.5b. That makes us nervous, to say the least.

Caveat Emptor

While Shenzhen Deren Electronic's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥46m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥741m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Shenzhen Deren Electronic that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.