We Think Shenzhen Xinhao Photoelectricity Technology (SZSE:301051) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Shenzhen Xinhao Photoelectricity Technology Co., Ltd (SZSE:301051) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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, 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.

View our latest analysis for Shenzhen Xinhao Photoelectricity Technology

What Is Shenzhen Xinhao Photoelectricity Technology's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Xinhao Photoelectricity Technology had debt of CN¥1.40b at the end of June 2024, a reduction from CN¥1.50b over a year. However, because it has a cash reserve of CN¥1.36b, its net debt is less, at about CN¥45.0m.

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

We can see from the most recent balance sheet that Shenzhen Xinhao Photoelectricity Technology had liabilities of CN¥1.96b falling due within a year, and liabilities of CN¥397.0m due beyond that. On the other hand, it had cash of CN¥1.36b and CN¥662.9m worth of receivables due within a year. So its liabilities total CN¥336.9m more than the combination of its cash and short-term receivables.

Of course, Shenzhen Xinhao Photoelectricity Technology has a market capitalization of CN¥5.14b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Shenzhen Xinhao Photoelectricity Technology has a very light debt load indeed. 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 Shenzhen Xinhao Photoelectricity 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.

Over 12 months, Shenzhen Xinhao Photoelectricity Technology reported revenue of CN¥1.8b, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Shenzhen Xinhao Photoelectricity Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥180m 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. However, it doesn't help that it burned through CN¥423m of cash over the last year. 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 example - Shenzhen Xinhao Photoelectricity Technology has 1 warning sign we think 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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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.