Is Suzhou Veichi Electric (SHSE:688698) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Suzhou Veichi Electric Co., Ltd. (SHSE:688698) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Suzhou Veichi Electric Carry?

As you can see below, Suzhou Veichi Electric had CN¥14.8m of debt at September 2024, down from CN¥23.1m a year prior. But on the other hand it also has CN¥327.5m in cash, leading to a CN¥312.7m net cash position.

How Strong Is Suzhou Veichi Electric's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Veichi Electric had liabilities of CN¥758.0m falling due within a year, and liabilities of CN¥32.6m due beyond that. Offsetting these obligations, it had cash of CN¥327.5m as well as receivables valued at CN¥856.8m due within 12 months. So it can boast CN¥393.6m more liquid assets than total liabilities.

This surplus suggests that Suzhou Veichi Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suzhou Veichi Electric has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Suzhou Veichi Electric

In addition to that, we're happy to report that Suzhou Veichi Electric has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Suzhou Veichi Electric can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Suzhou Veichi Electric 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. Over the last three years, Suzhou Veichi Electric saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Suzhou Veichi Electric has CN¥312.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 39% over the last year. So we don't have any problem with Suzhou Veichi Electric's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Suzhou Veichi Electric you should know about.

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.