Is Sunsea AIoT Technology (SZSE:002313) Using Too Much 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.' 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, Sunsea AIoT Technology Co., Ltd. (SZSE:002313) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sunsea AIoT Technology

How Much Debt Does Sunsea AIoT Technology Carry?

As you can see below, at the end of September 2024, Sunsea AIoT Technology had CN¥1.57b of debt, up from CN¥1.36b a year ago. Click the image for more detail. On the flip side, it has CN¥266.2m in cash leading to net debt of about CN¥1.30b.

How Healthy Is Sunsea AIoT Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sunsea AIoT Technology had liabilities of CN¥3.30b due within 12 months and liabilities of CN¥193.0m due beyond that. Offsetting these obligations, it had cash of CN¥266.2m as well as receivables valued at CN¥1.61b due within 12 months. So its liabilities total CN¥1.62b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Sunsea AIoT Technology has a market capitalization of CN¥3.80b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sunsea AIoT Technology'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, Sunsea AIoT Technology reported revenue of CN¥3.1b, which is a gain of 4.0%, 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

Importantly, Sunsea AIoT Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥88m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥300m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example - Sunsea AIoT Technology has 2 warning signs we think 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.