Is Suzhou Secote Precision ElectronicLTD (SHSE:603283) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Suzhou Secote Precision Electronic Co.,LTD (SHSE:603283) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Suzhou Secote Precision ElectronicLTD

How Much Debt Does Suzhou Secote Precision ElectronicLTD Carry?

The image below, which you can click on for greater detail, shows that Suzhou Secote Precision ElectronicLTD had debt of CN¥764.3m at the end of September 2023, a reduction from CN¥1.13b over a year. But it also has CN¥950.3m in cash to offset that, meaning it has CN¥186.0m net cash.

A Look At Suzhou Secote Precision ElectronicLTD's Liabilities

Zooming in on the latest balance sheet data, we can see that Suzhou Secote Precision ElectronicLTD had liabilities of CN¥3.47b due within 12 months and liabilities of CN¥100.1m due beyond that. Offsetting this, it had CN¥950.3m in cash and CN¥1.34b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.27b more than its cash and near-term receivables, combined.

Given Suzhou Secote Precision ElectronicLTD has a market capitalization of CN¥16.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Suzhou Secote Precision ElectronicLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Suzhou Secote Precision ElectronicLTD grew its EBIT by 113% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Suzhou Secote Precision ElectronicLTD 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Suzhou Secote Precision ElectronicLTD 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, Suzhou Secote Precision ElectronicLTD recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Suzhou Secote Precision ElectronicLTD has CN¥186.0m in net cash. And it impressed us with free cash flow of CN¥669m, being 90% of its EBIT. So is Suzhou Secote Precision ElectronicLTD's debt a risk? It doesn't seem so to us. 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 Suzhou Secote Precision ElectronicLTD you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.