We Think Suzhou Gold Mantis Construction Decoration (SZSE:002081) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Suzhou Gold Mantis Construction Decoration Co., Ltd. (SZSE:002081) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Suzhou Gold Mantis Construction Decoration

How Much Debt Does Suzhou Gold Mantis Construction Decoration Carry?

The chart below, which you can click on for greater detail, shows that Suzhou Gold Mantis Construction Decoration had CN¥853.4m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN¥5.68b in cash, so it actually has CN¥4.83b net cash.

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

We can see from the most recent balance sheet that Suzhou Gold Mantis Construction Decoration had liabilities of CN¥19.8b falling due within a year, and liabilities of CN¥708.5m due beyond that. On the other hand, it had cash of CN¥5.68b and CN¥21.4b worth of receivables due within a year. So it actually has CN¥6.58b more liquid assets than total liabilities.

This excess liquidity is a great indication that Suzhou Gold Mantis Construction Decoration's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Suzhou Gold Mantis Construction Decoration boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Suzhou Gold Mantis Construction Decoration saw its EBIT drop by 9.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Gold Mantis Construction Decoration 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Suzhou Gold Mantis Construction Decoration 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 two years, Suzhou Gold Mantis Construction Decoration recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Suzhou Gold Mantis Construction Decoration has net cash of CN¥4.83b, as well as more liquid assets than liabilities. So we don't have any problem with Suzhou Gold Mantis Construction Decoration's use of debt. 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. For example Suzhou Gold Mantis Construction Decoration has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.