Is Chengdu CORPRO TechnologyLtd (SZSE:300101) 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, Chengdu CORPRO Technology Co.,Ltd. (SZSE:300101) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Chengdu CORPRO TechnologyLtd

What Is Chengdu CORPRO TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Chengdu CORPRO TechnologyLtd had CN¥305.0m of debt in September 2024, down from CN¥321.7m, one year before. However, it also had CN¥219.7m in cash, and so its net debt is CN¥85.3m.

How Strong Is Chengdu CORPRO TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chengdu CORPRO TechnologyLtd had liabilities of CN¥799.6m due within 12 months and liabilities of CN¥35.2m due beyond that. On the other hand, it had cash of CN¥219.7m and CN¥1.25b worth of receivables due within a year. So it can boast CN¥636.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Chengdu CORPRO TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Chengdu CORPRO TechnologyLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Chengdu CORPRO TechnologyLtd'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, Chengdu CORPRO TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥800m, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Chengdu CORPRO TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥76m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And the cherry on top is that its actual free cash flow was CN¥26m with statutory profit coming in at CN¥48k. This one is a bit too risky for our liking. 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. To that end, you should be aware of the 3 warning signs we've spotted with Chengdu CORPRO TechnologyLtd .

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.