Is SBT Ultrasonic TechnologyLtd (SHSE:688392) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that SBT Ultrasonic Technology Co.,Ltd. (SHSE:688392) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SBT Ultrasonic TechnologyLtd

What Is SBT Ultrasonic TechnologyLtd's Net Debt?

As you can see below, at the end of March 2024, SBT Ultrasonic TechnologyLtd had CN¥238.4m of debt, up from CN¥207.3m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.38b in cash, leading to a CN¥1.14b net cash position.

How Healthy Is SBT Ultrasonic TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, SBT Ultrasonic TechnologyLtd had liabilities of CN¥392.8m due within 12 months, and liabilities of CN¥11.7m due beyond 12 months. On the other hand, it had cash of CN¥1.38b and CN¥352.2m worth of receivables due within a year. So it actually has CN¥1.33b more liquid assets than total liabilities.

This excess liquidity suggests that SBT Ultrasonic TechnologyLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, SBT Ultrasonic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, SBT Ultrasonic TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥483m, which is a fall of 18%. We would much prefer see growth.

So How Risky Is SBT Ultrasonic TechnologyLtd?

While SBT Ultrasonic TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥37m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should be aware of the 2 warning signs we've spotted with SBT Ultrasonic TechnologyLtd .

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.

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