Shenzhen Infinova (SZSE:002528) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Shenzhen Infinova Limited (SZSE:002528) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shenzhen Infinova

What Is Shenzhen Infinova's Net Debt?

As you can see below, Shenzhen Infinova had CN¥399.6m of debt at September 2024, down from CN¥896.6m a year prior. However, it also had CN¥201.0m in cash, and so its net debt is CN¥198.6m.

How Strong Is Shenzhen Infinova's Balance Sheet?

The latest balance sheet data shows that Shenzhen Infinova had liabilities of CN¥2.02b due within a year, and liabilities of CN¥176.6m falling due after that. On the other hand, it had cash of CN¥201.0m and CN¥1.09b worth of receivables due within a year. So it has liabilities totalling CN¥903.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shenzhen Infinova is worth CN¥3.98b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 Infinova'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, Shenzhen Infinova made a loss at the EBIT level, and saw its revenue drop to CN¥1.1b, which is a fall of 28%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Shenzhen Infinova's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥146m. 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. However, it doesn't help that it burned through CN¥2.3m of cash over the last year. So suffice it to say we do 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. For example - Shenzhen Infinova has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.