Would SVG Tech GroupLtd (SZSE:300331) Be Better Off With Less 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. We can see that SVG Tech Group Co.,Ltd. (SZSE:300331) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SVG Tech GroupLtd

What Is SVG Tech GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that SVG Tech GroupLtd had debt of CN¥689.9m at the end of September 2023, a reduction from CN¥785.4m over a year. However, it also had CN¥642.0m in cash, and so its net debt is CN¥48.0m.

How Strong Is SVG Tech GroupLtd's Balance Sheet?

According to the last reported balance sheet, SVG Tech GroupLtd had liabilities of CN¥1.13b due within 12 months, and liabilities of CN¥237.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥642.0m as well as receivables valued at CN¥683.9m due within 12 months. So it has liabilities totalling CN¥42.3m more than its cash and near-term receivables, combined.

This state of affairs indicates that SVG Tech GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.87b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, SVG Tech GroupLtd has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, SVG Tech GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 12%. We would much prefer see growth.

Caveat Emptor

While SVG Tech GroupLtd'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¥311m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥23m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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, we've discovered 2 warning signs for SVG Tech GroupLtd (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.