We Think SBT Ultrasonic Technology (SHSE:688392) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, SBT Ultrasonic Technology Co., Ltd. (SHSE:688392) does carry debt. But the more important question is: how much risk is that debt creating?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does SBT Ultrasonic Technology Carry?

As you can see below, at the end of September 2024, SBT Ultrasonic Technology had CN¥252.2m of debt, up from CN¥227.5m a year ago. Click the image for more detail. But it also has CN¥1.28b in cash to offset that, meaning it has CN¥1.02b net cash.

A Look At SBT Ultrasonic Technology's Liabilities

The latest balance sheet data shows that SBT Ultrasonic Technology had liabilities of CN¥385.1m due within a year, and liabilities of CN¥8.20m falling due after that. Offsetting this, it had CN¥1.28b in cash and CN¥437.4m in receivables that were due within 12 months. So it actually has 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. Succinctly put, SBT Ultrasonic Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for SBT Ultrasonic Technology

Better yet, SBT Ultrasonic Technology grew its EBIT by 413% last year, which is an impressive improvement. 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SBT Ultrasonic Technology 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, SBT Ultrasonic Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SBT Ultrasonic Technology has net cash of CN¥1.02b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 413% over the last year. So we don't think SBT Ultrasonic Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - SBT Ultrasonic Technology has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.