SVG Tech GroupLtd (SZSE:300331) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 SVG Tech Group Co.,Ltd. (SZSE:300331) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 SVG Tech GroupLtd

What Is SVG Tech GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 SVG Tech GroupLtd had CN¥838.8m of debt, an increase on CN¥787.1m, over one year. However, it does have CN¥754.2m in cash offsetting this, leading to net debt of about CN¥84.6m.

A Look At SVG Tech GroupLtd's Liabilities

The latest balance sheet data shows that SVG Tech GroupLtd had liabilities of CN¥1.23b due within a year, and liabilities of CN¥299.8m falling due after that. Offsetting these obligations, it had cash of CN¥754.2m as well as receivables valued at CN¥683.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥92.3m.

Since publicly traded SVG Tech GroupLtd shares are worth a total of CN¥4.02b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 SVG Tech GroupLtd 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 SVG Tech GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 5.2%, to CN¥1.8b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, SVG Tech GroupLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥41m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥38m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for SVG Tech GroupLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.