Does SUFA Technology Industry CNNC (SZSE:000777) Have A Healthy Balance Sheet?

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. As with many other companies SUFA Technology Industry Co., Ltd., CNNC (SZSE:000777) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SUFA Technology Industry CNNC

How Much Debt Does SUFA Technology Industry CNNC Carry?

The image below, which you can click on for greater detail, shows that SUFA Technology Industry CNNC had debt of CN¥129.6m at the end of March 2024, a reduction from CN¥151.7m over a year. However, it does have CN¥80.0m in cash offsetting this, leading to net debt of about CN¥49.6m.

How Strong Is SUFA Technology Industry CNNC's Balance Sheet?

The latest balance sheet data shows that SUFA Technology Industry CNNC had liabilities of CN¥1.26b due within a year, and liabilities of CN¥37.5m falling due after that. Offsetting these obligations, it had cash of CN¥80.0m as well as receivables valued at CN¥1.15b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥76.9m.

Having regard to SUFA Technology Industry CNNC's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.18b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, SUFA Technology Industry CNNC has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

SUFA Technology Industry CNNC has net debt of just 0.61 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. On top of that, SUFA Technology Industry CNNC grew its EBIT by 95% over the last twelve months, and that growth will make it easier to handle its 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 SUFA Technology Industry CNNC 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 company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last two years, SUFA Technology Industry CNNC burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Happily, SUFA Technology Industry CNNC's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that SUFA Technology Industry CNNC can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with SUFA Technology Industry CNNC .

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.

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