Is SBT Ultrasonic Technology (SHSE:688392) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, SBT Ultrasonic Technology Co., Ltd. (SHSE:688392) does carry debt. But the real question is whether this debt is making the company risky.

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 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, plenty of companies use debt to fund growth, without any negative consequences. 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 SBT Ultrasonic Technology

What Is SBT Ultrasonic Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 SBT Ultrasonic Technology had debt of CN¥243.1m, up from CN¥225.5m in one year. However, it does have CN¥1.28b in cash offsetting this, leading to net cash of CN¥1.03b.

A Look At SBT Ultrasonic Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that SBT Ultrasonic Technology had liabilities of CN¥385.1m due within 12 months and liabilities of CN¥8.20m due beyond that. Offsetting these obligations, it had cash of CN¥1.28b as well as receivables valued at CN¥437.4m due within 12 months. So it can boast CN¥1.32b more liquid assets than total liabilities.

This surplus suggests that SBT Ultrasonic Technology is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that SBT Ultrasonic Technology has more cash than debt is arguably a good indication that it can manage its debt safely. 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 SBT Ultrasonic Technology'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.

Over 12 months, SBT Ultrasonic Technology made a loss at the EBIT level, and saw its revenue drop to CN¥478m, which is a fall of 19%. We would much prefer see growth.

So How Risky Is SBT Ultrasonic Technology?

Although SBT Ultrasonic Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥11m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 3 warning signs with SBT Ultrasonic Technology (at least 1 which is potentially serious) , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.