We Think Guangdong Faith Long Crystal TechnologyLTD (SZSE:300460) Has A Fair Chunk Of 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.' 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. As with many other companies Guangdong Faith Long Crystal Technology Co.,LTD. (SZSE:300460) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangdong Faith Long Crystal TechnologyLTD

What Is Guangdong Faith Long Crystal TechnologyLTD's Net Debt?

As you can see below, Guangdong Faith Long Crystal TechnologyLTD had CN¥477.3m of debt at September 2024, down from CN¥502.7m a year prior. On the flip side, it has CN¥71.5m in cash leading to net debt of about CN¥405.9m.

A Look At Guangdong Faith Long Crystal TechnologyLTD's Liabilities

The latest balance sheet data shows that Guangdong Faith Long Crystal TechnologyLTD had liabilities of CN¥624.8m due within a year, and liabilities of CN¥287.9m falling due after that. Offsetting this, it had CN¥71.5m in cash and CN¥280.8m in receivables that were due within 12 months. So its liabilities total CN¥560.4m more than the combination of its cash and short-term receivables.

Of course, Guangdong Faith Long Crystal TechnologyLTD has a market capitalization of CN¥3.83b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangdong Faith Long Crystal TechnologyLTD'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 Guangdong Faith Long Crystal TechnologyLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to CN¥526m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Guangdong Faith Long Crystal TechnologyLTD still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥143m. 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. However, it doesn't help that it burned through CN¥33m of cash over the last year. 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 - Guangdong Faith Long Crystal TechnologyLTD has 3 warning signs we think 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.