Nanjing Sample Technology (HKG:1708) Is Carrying A Fair Bit 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 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. Importantly, Nanjing Sample Technology Company Limited (HKG:1708) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nanjing Sample Technology

How Much Debt Does Nanjing Sample Technology Carry?

The chart below, which you can click on for greater detail, shows that Nanjing Sample Technology had CN¥1.15b in debt in December 2020; about the same as the year before. However, it does have CN¥401.4m in cash offsetting this, leading to net debt of about CN¥743.7m.

A Look At Nanjing Sample Technology's Liabilities

The latest balance sheet data shows that Nanjing Sample Technology had liabilities of CN¥1.98b due within a year, and liabilities of CN¥221.7m falling due after that. Offsetting these obligations, it had cash of CN¥401.4m as well as receivables valued at CN¥1.73b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥67.6m.

Of course, Nanjing Sample Technology has a market capitalization of CN¥3.10b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Nanjing Sample Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Nanjing Sample Technology had a loss before interest and tax, and actually shrunk its revenue by 36%, to CN¥946m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Nanjing Sample Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥108m 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. For example, we would not want to see a repeat of last year's loss of CN¥139m. In the meantime, we consider the stock very risky. 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. For instance, we've identified 2 warning signs for Nanjing Sample Technology (1 is potentially serious) 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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