Here's Why Kingsignal Technology (SZSE:300252) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Kingsignal Technology Co., Ltd. (SZSE:300252) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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. 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 Kingsignal Technology

How Much Debt Does Kingsignal Technology Carry?

As you can see below, Kingsignal Technology had CN¥1.42b of debt at March 2024, down from CN¥1.82b a year prior. However, it does have CN¥796.4m in cash offsetting this, leading to net debt of about CN¥620.3m.

How Strong Is Kingsignal Technology's Balance Sheet?

The latest balance sheet data shows that Kingsignal Technology had liabilities of CN¥2.62b due within a year, and liabilities of CN¥237.6m falling due after that. Offsetting these obligations, it had cash of CN¥796.4m as well as receivables valued at CN¥1.45b due within 12 months. So it has liabilities totalling CN¥612.5m more than its cash and near-term receivables, combined.

Given Kingsignal Technology has a market capitalization of CN¥4.17b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kingsignal Technology's earnings that will influence how the balance sheet holds up in the future. 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 Kingsignal Technology had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥1.8b. That's not what we would hope to see.

Caveat Emptor

While Kingsignal Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥272m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥207m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Kingsignal Technology that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.