Suzhou Secote Precision ElectronicLTD (SHSE:603283) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Suzhou Secote Precision Electronic Co.,LTD (SHSE:603283) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Suzhou Secote Precision ElectronicLTD

What Is Suzhou Secote Precision ElectronicLTD's Net Debt?

The image below, which you can click on for greater detail, shows that Suzhou Secote Precision ElectronicLTD had debt of CN¥376.9m at the end of March 2024, a reduction from CN¥977.7m over a year. But it also has CN¥741.9m in cash to offset that, meaning it has CN¥365.0m net cash.

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

The latest balance sheet data shows that Suzhou Secote Precision ElectronicLTD had liabilities of CN¥2.32b due within a year, and liabilities of CN¥114.0m falling due after that. Offsetting this, it had CN¥741.9m in cash and CN¥854.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥832.7m more than its cash and near-term receivables, combined.

Given Suzhou Secote Precision ElectronicLTD has a market capitalization of CN¥14.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Suzhou Secote Precision ElectronicLTD also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Suzhou Secote Precision ElectronicLTD grew its EBIT by 134% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Suzhou Secote Precision ElectronicLTD has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Suzhou Secote Precision ElectronicLTD produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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¥365.0m in net cash. And we liked the look of last year's 134% year-on-year EBIT growth. So is Suzhou Secote Precision ElectronicLTD's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Suzhou Secote Precision ElectronicLTD's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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