Is Shenzhen Xinhao Photoelectricity Technology (SZSE:301051) A Risky Investment?

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 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. Importantly, Shenzhen Xinhao Photoelectricity Technology Co., Ltd (SZSE:301051) 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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shenzhen Xinhao Photoelectricity Technology

What Is Shenzhen Xinhao Photoelectricity Technology's Debt?

As you can see below, at the end of September 2023, Shenzhen Xinhao Photoelectricity Technology had CN¥1.43b of debt, up from CN¥582.0m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥768.6m, its net debt is less, at about CN¥656.9m.

How Strong Is Shenzhen Xinhao Photoelectricity Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Xinhao Photoelectricity Technology had liabilities of CN¥1.91b due within 12 months and liabilities of CN¥324.6m due beyond that. Offsetting this, it had CN¥768.6m in cash and CN¥726.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥736.2m.

Since publicly traded Shenzhen Xinhao Photoelectricity Technology shares are worth a total of CN¥5.55b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Xinhao Photoelectricity Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Xinhao Photoelectricity Technology's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Shenzhen Xinhao Photoelectricity Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥164m 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¥263m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Shenzhen Xinhao Photoelectricity Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.