Health Check: How Prudently Does SenseTime Group (HKG:20) Use 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 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, SenseTime Group Inc. (HKG:20) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SenseTime Group

How Much Debt Does SenseTime Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 SenseTime Group had CN¥6.15b of debt, an increase on CN¥4.32b, over one year. But on the other hand it also has CN¥11.0b in cash, leading to a CN¥4.90b net cash position.

How Strong Is SenseTime Group's Balance Sheet?

According to the last reported balance sheet, SenseTime Group had liabilities of CN¥3.29b due within 12 months, and liabilities of CN¥6.45b due beyond 12 months. Offsetting this, it had CN¥11.0b in cash and CN¥5.18b in receivables that were due within 12 months. So it can boast CN¥6.49b more liquid assets than total liabilities.

This excess liquidity suggests that SenseTime Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, SenseTime Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SenseTime Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year SenseTime Group had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥3.4b. We would much prefer see growth.

So How Risky Is SenseTime Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year SenseTime Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥4.8b and booked a CN¥6.4b accounting loss. But at least it has CN¥4.90b on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 1 warning sign for SenseTime Group you should be aware of.

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.