Does Suzhou Secote Precision ElectronicLTD (SHSE:603283) Have A Healthy Balance Sheet?

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. Importantly, Suzhou Secote Precision Electronic Co.,LTD (SHSE:603283) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

How Much Debt Does Suzhou Secote Precision ElectronicLTD Carry?

As you can see below, at the end of September 2024, Suzhou Secote Precision ElectronicLTD had CN¥1.00b of debt, up from CN¥764.3m a year ago. Click the image for more detail. However, it also had CN¥734.0m in cash, and so its net debt is CN¥270.4m.

How Strong Is Suzhou Secote Precision ElectronicLTD's Balance Sheet?

The latest balance sheet data shows that Suzhou Secote Precision ElectronicLTD had liabilities of CN¥3.11b due within a year, and liabilities of CN¥100.0m falling due after that. Offsetting this, it had CN¥734.0m in cash and CN¥2.18b in receivables that were due within 12 months. So it has liabilities totalling CN¥299.6m more than its cash and near-term receivables, combined.

Since publicly traded Suzhou Secote Precision ElectronicLTD shares are worth a total of CN¥12.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

View our latest analysis for Suzhou Secote Precision ElectronicLTD

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Suzhou Secote Precision ElectronicLTD's net debt is only 0.26 times its EBITDA. And its EBIT covers its interest expense a whopping 239 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we're happy to report that Suzhou Secote Precision ElectronicLTD has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Suzhou Secote Precision ElectronicLTD'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Suzhou Secote Precision ElectronicLTD's free cash flow amounted to 32% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Suzhou Secote Precision ElectronicLTD's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Looking at the bigger picture, we think Suzhou Secote Precision ElectronicLTD's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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 example - Suzhou Secote Precision ElectronicLTD has 1 warning sign we think you should be aware of.

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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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.