Stock Analysis

Is Sharetronic Data Technology (SZSE:300857) Using Too Much Debt?

SZSE:300857
Source: Shutterstock

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sharetronic Data Technology Co., Ltd. (SZSE:300857) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sharetronic Data Technology

How Much Debt Does Sharetronic Data Technology Carry?

As you can see below, at the end of March 2024, Sharetronic Data Technology had CN¥1.52b of debt, up from CN¥547.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.75b in cash, leading to a CN¥228.5m net cash position.

debt-equity-history-analysis
SZSE:300857 Debt to Equity History June 21st 2024

How Healthy Is Sharetronic Data Technology's Balance Sheet?

According to the last reported balance sheet, Sharetronic Data Technology had liabilities of CN¥2.82b due within 12 months, and liabilities of CN¥128.6m due beyond 12 months. Offsetting this, it had CN¥1.75b in cash and CN¥1.31b in receivables that were due within 12 months. So it can boast CN¥108.8m more liquid assets than total liabilities.

Having regard to Sharetronic Data Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥14.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Sharetronic Data Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Sharetronic Data Technology grew its EBIT by 198% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Sharetronic Data Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sharetronic Data Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Sharetronic Data Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sharetronic Data Technology has CN¥228.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 198% over the last year. So we don't have any problem with Sharetronic Data Technology's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Sharetronic Data Technology .

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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

About SZSE:300857

Sharetronic Data Technology

Operates as a provider of wireless IoT products in China and internationally.

Exceptional growth potential with solid track record.

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