Would SVG Tech GroupLtd (SZSE:300331) Be Better Off With Less 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 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. We note that SVG Tech Group Co.,Ltd. (SZSE:300331) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SVG Tech GroupLtd

What Is SVG Tech GroupLtd's Debt?

As you can see below, at the end of September 2024, SVG Tech GroupLtd had CN¥747.8m of debt, up from CN¥689.9m a year ago. Click the image for more detail. However, it does have CN¥719.7m in cash offsetting this, leading to net debt of about CN¥28.0m.

How Healthy Is SVG Tech GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SVG Tech GroupLtd had liabilities of CN¥1.15b due within 12 months and liabilities of CN¥288.4m due beyond that. Offsetting these obligations, it had cash of CN¥719.7m as well as receivables valued at CN¥674.4m due within 12 months. So its liabilities total CN¥45.3m more than the combination of its cash and short-term receivables.

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¥4.93b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, SVG Tech GroupLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is SVG Tech GroupLtd'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.

In the last year SVG Tech GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥1.9b. 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. To be specific the EBIT loss came in at CN¥29m. 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. For example, we would not want to see a repeat of last year's loss of CN¥19m. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for SVG Tech GroupLtd you should be aware of.

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.