Kingsignal Technology (SZSE:300252) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Kingsignal Technology Co., Ltd. (SZSE:300252) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Kingsignal Technology

What Is Kingsignal Technology's Debt?

The image below, which you can click on for greater detail, shows that Kingsignal Technology had debt of CN¥1.01b at the end of September 2024, a reduction from CN¥1.47b over a year. However, it also had CN¥557.0m in cash, and so its net debt is CN¥457.5m.

How Strong Is Kingsignal Technology's Balance Sheet?

According to the last reported balance sheet, Kingsignal Technology had liabilities of CN¥2.44b due within 12 months, and liabilities of CN¥109.4m due beyond 12 months. Offsetting this, it had CN¥557.0m in cash and CN¥1.33b in receivables that were due within 12 months. So its liabilities total CN¥661.9m more than the combination of its cash and short-term receivables.

Since publicly traded Kingsignal Technology shares are worth a total of CN¥7.47b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Kingsignal Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kingsignal Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 3.9%, to CN¥2.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Kingsignal Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥290m 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¥300m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Kingsignal Technology .

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.