We Think Suzhou Recodeal Interconnect SystemLtd (SHSE:688800) Can Stay On Top Of Its 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.' 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 Suzhou Recodeal Interconnect System Co.,Ltd (SHSE:688800) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Suzhou Recodeal Interconnect SystemLtd

What Is Suzhou Recodeal Interconnect SystemLtd's Debt?

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. But on the other hand it also has CN¥1.05b in cash, leading to a CN¥458.7m net cash position.

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

According to the last reported balance sheet, Suzhou Recodeal Interconnect SystemLtd had liabilities of CN¥1.58b due within 12 months, and liabilities of CN¥282.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.05b as well as receivables valued at CN¥976.6m due within 12 months. So it actually has 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.

And we also note warmly that Suzhou Recodeal Interconnect SystemLtd grew its EBIT by 10% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Suzhou Recodeal Interconnect SystemLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Suzhou Recodeal Interconnect SystemLtd 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 Recodeal Interconnect SystemLtd saw substantial negative free cash flow, in total. 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 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 don't have any problem with Suzhou Recodeal Interconnect SystemLtd'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. We've identified 2 warning signs with Suzhou Recodeal Interconnect SystemLtd (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.