Is Shenzhen Mason TechnologiesLtd (SZSE:002654) 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.' 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. As with many other companies Shenzhen Mason Technologies Co.,Ltd (SZSE:002654) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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.

See our latest analysis for Shenzhen Mason TechnologiesLtd

What Is Shenzhen Mason TechnologiesLtd's Debt?

As you can see below, Shenzhen Mason TechnologiesLtd had CN¥876.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥759.9m in cash, and so its net debt is CN¥116.2m.

A Look At Shenzhen Mason TechnologiesLtd's Liabilities

The latest balance sheet data shows that Shenzhen Mason TechnologiesLtd had liabilities of CN¥2.36b due within a year, and liabilities of CN¥580.8m falling due after that. On the other hand, it had cash of CN¥759.9m and CN¥1.76b worth of receivables due within a year. So it has liabilities totalling CN¥417.3m more than its cash and near-term receivables, combined.

Given Shenzhen Mason TechnologiesLtd has a market capitalization of CN¥9.23b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Shenzhen Mason TechnologiesLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Mason TechnologiesLtd will need earnings to service that debt. 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 Mason TechnologiesLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to CN¥4.9b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Shenzhen Mason TechnologiesLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥134m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of CN¥48m. So to be blunt we do think it is 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 Mason TechnologiesLtd has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.