Does Shenzhen Kexin Communication TechnologiesLtd (SZSE:300565) Have A Healthy Balance Sheet?

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.' 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. Importantly, Shenzhen Kexin Communication Technologies Co.,Ltd (SZSE:300565) does carry debt. But is this debt a concern to shareholders?

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. 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. 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 Shenzhen Kexin Communication TechnologiesLtd

What Is Shenzhen Kexin Communication TechnologiesLtd's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Kexin Communication TechnologiesLtd had debt of CN¥696.2m at the end of September 2024, a reduction from CN¥806.5m over a year. However, it does have CN¥76.7m in cash offsetting this, leading to net debt of about CN¥619.5m.

How Strong Is Shenzhen Kexin Communication TechnologiesLtd's Balance Sheet?

The latest balance sheet data shows that Shenzhen Kexin Communication TechnologiesLtd had liabilities of CN¥605.2m due within a year, and liabilities of CN¥333.4m falling due after that. On the other hand, it had cash of CN¥76.7m and CN¥161.5m worth of receivables due within a year. So it has liabilities totalling CN¥700.3m more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen Kexin Communication TechnologiesLtd shares are worth a total of CN¥3.97b, 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 it is Shenzhen Kexin Communication TechnologiesLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shenzhen Kexin Communication TechnologiesLtd had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥453m. That's not what we would hope to see.

Caveat Emptor

Not only did Shenzhen Kexin Communication TechnologiesLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥237m at the EBIT level. 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. However, it doesn't help that it burned through CN¥195m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Be aware that Shenzhen Kexin Communication TechnologiesLtd is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.