Health Check: How Prudently Does Sprocomm Intelligence (HKG:1401) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Sprocomm Intelligence Limited (HKG:1401) makes use of debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Sprocomm Intelligence Carry?

The image below, which you can click on for greater detail, shows that Sprocomm Intelligence had debt of CN¥147.7m at the end of December 2024, a reduction from CN¥154.4m over a year. However, it does have CN¥79.4m in cash offsetting this, leading to net debt of about CN¥68.3m.

How Healthy Is Sprocomm Intelligence's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sprocomm Intelligence had liabilities of CN¥2.97b due within 12 months and liabilities of CN¥60.8m due beyond that. On the other hand, it had cash of CN¥79.4m and CN¥673.2m worth of receivables due within a year. So its liabilities total CN¥2.28b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥985.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sprocomm Intelligence would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Sprocomm Intelligence's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Check out our latest analysis for Sprocomm Intelligence

Over 12 months, Sprocomm Intelligence reported revenue of CN¥2.9b, which is a gain of 3.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Sprocomm Intelligence had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥17m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CN¥46m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For instance, we've identified 4 warning signs for Sprocomm Intelligence (1 is concerning) you should be aware of.

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.