Is Suzhou West Deane New Power ElectricLtd (SHSE:603312) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Suzhou West Deane New Power Electric Co.,Ltd. (SHSE:603312) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Suzhou West Deane New Power ElectricLtd

How Much Debt Does Suzhou West Deane New Power ElectricLtd Carry?

The image below, which you can click on for greater detail, shows that Suzhou West Deane New Power ElectricLtd had debt of CN¥52.5m at the end of September 2024, a reduction from CN¥161.3m over a year. However, its balance sheet shows it holds CN¥889.8m in cash, so it actually has CN¥837.3m net cash.

How Healthy Is Suzhou West Deane New Power ElectricLtd's Balance Sheet?

We can see from the most recent balance sheet that Suzhou West Deane New Power ElectricLtd had liabilities of CN¥861.6m falling due within a year, and liabilities of CN¥4.02m due beyond that. Offsetting these obligations, it had cash of CN¥889.8m as well as receivables valued at CN¥1.10b due within 12 months. So it actually has CN¥1.13b more liquid assets than total liabilities.

It's good to see that Suzhou West Deane New Power ElectricLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Suzhou West Deane New Power ElectricLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Suzhou West Deane New Power ElectricLtd has increased its EBIT by 3.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Suzhou West Deane New Power ElectricLtd's ability to maintain a healthy balance sheet going forward. 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. Suzhou West Deane New Power ElectricLtd 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. Considering the last two years, Suzhou West Deane New Power ElectricLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Suzhou West Deane New Power ElectricLtd has CN¥837.3m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 3.2% over the last year. So we are not troubled with Suzhou West Deane New Power ElectricLtd's debt use. 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. We've identified 1 warning sign with Suzhou West Deane New Power ElectricLtd , and understanding them should be part of your investment process.

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.