Suzhou Gold Mantis Construction Decoration (SZSE:002081) Has Debt But No Earnings; Should You Worry?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Suzhou Gold Mantis Construction Decoration Co., Ltd. (SZSE:002081) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Suzhou Gold Mantis Construction Decoration

How Much Debt Does Suzhou Gold Mantis Construction Decoration Carry?

You can click the graphic below for the historical numbers, but it shows that Suzhou Gold Mantis Construction Decoration had CN¥917.1m of debt in September 2023, down from CN¥1.08b, one year before. But on the other hand it also has CN¥6.63b in cash, leading to a CN¥5.71b net cash position.

How Healthy Is Suzhou Gold Mantis Construction Decoration's Balance Sheet?

According to the last reported balance sheet, Suzhou Gold Mantis Construction Decoration had liabilities of CN¥23.1b due within 12 months, and liabilities of CN¥778.3m due beyond 12 months. Offsetting this, it had CN¥6.63b in cash and CN¥23.4b in receivables that were due within 12 months. So it actually has CN¥6.11b more liquid assets than total liabilities.

This luscious liquidity implies that Suzhou Gold Mantis Construction Decoration's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Suzhou Gold Mantis Construction Decoration has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Gold Mantis Construction Decoration'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.

Over 12 months, Suzhou Gold Mantis Construction Decoration made a loss at the EBIT level, and saw its revenue drop to CN¥21b, which is a fall of 9.9%. We would much prefer see growth.

So How Risky Is Suzhou Gold Mantis Construction Decoration?

Although Suzhou Gold Mantis Construction Decoration had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥921m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. For instance, we've identified 2 warning signs for Suzhou Gold Mantis Construction Decoration that you should be aware of.

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.