The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sharetronic Data Technology Co., Ltd. (SZSE:300857) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Sharetronic Data Technology
As you can see below, at the end of June 2024, Sharetronic Data Technology had CN¥1.67b of debt, up from CN¥575.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.69b in cash, so it actually has CN¥17.2m net cash.
According to the last reported balance sheet, Sharetronic Data Technology had liabilities of CN¥2.95b due within 12 months, and liabilities of CN¥152.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.69b as well as receivables valued at CN¥1.60b due within 12 months. So it can boast CN¥184.2m more liquid assets than total liabilities.
Having regard to Sharetronic Data Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥19.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Sharetronic Data Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Sharetronic Data Technology grew its EBIT by 232% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Sharetronic Data Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sharetronic Data Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Sharetronic Data Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While it is always sensible to investigate a company's debt, in this case Sharetronic Data Technology has CN¥17.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 232% year-on-year EBIT growth. So we don't have any problem with Sharetronic Data Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sharetronic Data Technology is showing 2 warning signs in our investment analysis , you should know about...
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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