We Think Suzhou Recodeal Interconnect SystemLtd (SHSE:688800) Can Stay On Top Of Its Debt

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.' 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, Suzhou Recodeal Interconnect System Co.,Ltd (SHSE:688800) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Suzhou Recodeal Interconnect SystemLtd

How Much Debt Does Suzhou Recodeal Interconnect SystemLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Suzhou Recodeal Interconnect SystemLtd had debt of CN¥587.3m, up from CN¥369.3m in one year. However, its balance sheet shows it holds CN¥1.05b in cash, so it actually has CN¥458.7m net cash.

How Healthy Is Suzhou Recodeal Interconnect SystemLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Recodeal Interconnect SystemLtd had liabilities of CN¥1.58b due within 12 months and liabilities of CN¥282.8m due beyond that. On the other hand, it had cash of CN¥1.05b and CN¥976.6m worth of receivables due within a year. So it can boast CN¥162.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Recodeal Interconnect SystemLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Suzhou Recodeal Interconnect SystemLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Suzhou Recodeal Interconnect SystemLtd grew its EBIT at 10% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Suzhou Recodeal Interconnect SystemLtd can strengthen its balance sheet over time. 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 Suzhou Recodeal Interconnect SystemLtd 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, Suzhou Recodeal Interconnect SystemLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Suzhou Recodeal Interconnect SystemLtd has net cash of CN¥458.7m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 10% in the last twelve months. So we are not troubled with Suzhou Recodeal Interconnect SystemLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Suzhou Recodeal Interconnect SystemLtd (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.