Would Shenzhen Longsys Electronics (SZSE:301308) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Longsys Electronics Co., Ltd. (SZSE:301308) 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenzhen Longsys Electronics

What Is Shenzhen Longsys Electronics's Debt?

As you can see below, at the end of March 2024, Shenzhen Longsys Electronics had CN¥6.36b of debt, up from CN¥1.41b a year ago. Click the image for more detail. On the flip side, it has CN¥900.2m in cash leading to net debt of about CN¥5.46b.

How Strong Is Shenzhen Longsys Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Longsys Electronics had liabilities of CN¥6.85b due within 12 months and liabilities of CN¥2.34b due beyond that. On the other hand, it had cash of CN¥900.2m and CN¥1.80b worth of receivables due within a year. So it has liabilities totalling CN¥6.49b more than its cash and near-term receivables, combined.

Of course, Shenzhen Longsys Electronics has a market capitalization of CN¥36.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Longsys Electronics 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.

In the last year Shenzhen Longsys Electronics wasn't profitable at an EBIT level, but managed to grow its revenue by 75%, to CN¥13b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Shenzhen Longsys Electronics still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥276m. 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¥3.8b of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Shenzhen Longsys Electronics is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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