Visionox Technology (SZSE:002387) Has Debt But No Earnings; Should You Worry?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Visionox Technology Inc. (SZSE:002387) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Visionox Technology

What Is Visionox Technology's Debt?

As you can see below, at the end of September 2024, Visionox Technology had CN¥16.5b of debt, up from CN¥10.7b a year ago. Click the image for more detail. On the flip side, it has CN¥6.79b in cash leading to net debt of about CN¥9.67b.

How Healthy Is Visionox Technology's Balance Sheet?

The latest balance sheet data shows that Visionox Technology had liabilities of CN¥20.3b due within a year, and liabilities of CN¥9.50b falling due after that. On the other hand, it had cash of CN¥6.79b and CN¥2.98b worth of receivables due within a year. So it has liabilities totalling CN¥20.1b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥17.9b, we think shareholders really should watch Visionox Technology's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Visionox Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Visionox Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥7.7b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Visionox Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥3.2b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥3.0b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. Be aware that Visionox Technology is showing 2 warning signs in our investment analysis , you should know about...

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.