Health Check: How Prudently Does Vanjee Technology (SZSE:300552) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Vanjee Technology Co., Ltd. (SZSE:300552) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vanjee Technology

What Is Vanjee Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Vanjee Technology had CN¥199.1m of debt, an increase on CN¥45.0m, over one year. But on the other hand it also has CN¥410.0m in cash, leading to a CN¥211.0m net cash position.

A Look At Vanjee Technology's Liabilities

According to the last reported balance sheet, Vanjee Technology had liabilities of CN¥910.8m due within 12 months, and liabilities of CN¥110.8m due beyond 12 months. Offsetting this, it had CN¥410.0m in cash and CN¥1.12b in receivables that were due within 12 months. So it can boast CN¥504.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Vanjee Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Vanjee Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Vanjee Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Vanjee Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥992m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Vanjee Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Vanjee Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥239m and booked a CN¥426m accounting loss. But at least it has CN¥211.0m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 1 warning sign for Vanjee Technology 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.