Health Check: How Prudently Does SenseTime Group (HKG:20) Use Debt?

Warren Buffett famously said, '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. Importantly, SenseTime Group Inc. (HKG:20) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SenseTime Group

What Is SenseTime Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 SenseTime Group had CN¥5.62b of debt, an increase on CN¥4.32b, over one year. However, its balance sheet shows it holds CN¥11.0b in cash, so it actually has CN¥5.43b net cash.

How Strong Is SenseTime Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SenseTime Group had liabilities of CN¥3.29b due within 12 months and liabilities of CN¥6.45b due beyond that. On the other hand, it had cash of CN¥11.0b and CN¥3.83b worth of receivables due within a year. So it can boast CN¥5.14b more liquid assets than total liabilities.

This short term liquidity is a sign that SenseTime Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SenseTime Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SenseTime Group 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 SenseTime Group had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥3.4b. That's not what we would hope to see.

So How Risky Is SenseTime Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months SenseTime Group lost money at the earnings before interest and tax (EBIT) line. 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¥5.43b 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 2 warning signs for SenseTime Group you should be aware of, and 1 of them is a bit unpleasant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com