Shenzhen Kexin Communication TechnologiesLtd (SZSE:300565) Is Carrying A Fair Bit Of 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. As with many other companies Shenzhen Kexin Communication Technologies Co.,Ltd (SZSE:300565) 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shenzhen Kexin Communication TechnologiesLtd

How Much Debt Does Shenzhen Kexin Communication TechnologiesLtd Carry?

As you can see below, Shenzhen Kexin Communication TechnologiesLtd had CN¥696.2m of debt at September 2024, down from CN¥806.5m a year prior. However, it does have CN¥76.7m in cash offsetting this, leading to net debt of about CN¥619.5m.

A Look At Shenzhen Kexin Communication TechnologiesLtd's Liabilities

According to the last reported balance sheet, Shenzhen Kexin Communication TechnologiesLtd had liabilities of CN¥605.2m due within 12 months, and liabilities of CN¥333.4m due beyond 12 months. On the other hand, it had cash of CN¥76.7m and CN¥161.5m worth of receivables due within a year. So its liabilities total CN¥700.3m more than the combination of its cash and short-term receivables.

Since publicly traded Shenzhen Kexin Communication TechnologiesLtd shares are worth a total of CN¥3.73b, 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

While Shenzhen Kexin Communication TechnologiesLtd'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¥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. 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¥195m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. For instance, we've identified 3 warning signs for Shenzhen Kexin Communication TechnologiesLtd (2 are significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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