Is Shenzhen Xinhao Photoelectricity Technology (SZSE:301051) Using Too Much Debt?

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 Shenzhen Xinhao Photoelectricity Technology Co., Ltd (SZSE:301051) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See 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 March 2024, Shenzhen Xinhao Photoelectricity Technology had CN¥1.53b of debt, up from CN¥1.23b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥835.9m, its net debt is less, at about CN¥690.5m.

A Look At Shenzhen Xinhao Photoelectricity Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenzhen Xinhao Photoelectricity Technology had liabilities of CN¥1.83b due within 12 months and liabilities of CN¥420.0m due beyond that. Offsetting these obligations, it had cash of CN¥835.9m as well as receivables valued at CN¥681.7m due within 12 months. So its liabilities total CN¥733.0m more than the combination of its cash and short-term receivables.

Since publicly traded Shenzhen Xinhao Photoelectricity Technology shares are worth a total of CN¥3.99b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥1.9b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Shenzhen Xinhao Photoelectricity Technology managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥45m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥341m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Xinhao Photoelectricity Technology .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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