Here's Why Suzhou Anjie Technology (SZSE:002635) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Suzhou Anjie Technology Co., Ltd. (SZSE:002635) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 Suzhou Anjie Technology

How Much Debt Does Suzhou Anjie Technology Carry?

The image below, which you can click on for greater detail, shows that Suzhou Anjie Technology had debt of CN¥312.5m at the end of September 2023, a reduction from CN¥390.1m over a year. However, it does have CN¥1.84b in cash offsetting this, leading to net cash of CN¥1.53b.

How Healthy Is Suzhou Anjie Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Anjie Technology had liabilities of CN¥1.60b due within 12 months and liabilities of CN¥241.5m due beyond that. On the other hand, it had cash of CN¥1.84b and CN¥1.37b worth of receivables due within a year. So it actually has CN¥1.37b more liquid assets than total liabilities.

This excess liquidity suggests that Suzhou Anjie Technology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Suzhou Anjie Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Suzhou Anjie Technology grew its EBIT by 30% 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 Suzhou Anjie Technology 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 Anjie Technology 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 Anjie Technology saw substantial negative free cash flow, in total. 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 Anjie Technology has net cash of CN¥1.53b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 30% over the last year. So we are not troubled with Suzhou Anjie Technology'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. We've identified 2 warning signs with Suzhou Anjie Technology , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.