Suzhou Anjie Technology (SZSE:002635) Has A Pretty Healthy Balance Sheet

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 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. As with many other companies Suzhou Anjie Technology Co., Ltd. (SZSE:002635) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Anjie Technology

What Is Suzhou Anjie Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Suzhou Anjie Technology had debt of CN¥797.7m, up from CN¥377.2m in one year. But on the other hand it also has CN¥1.95b in cash, leading to a CN¥1.15b net cash position.

How Healthy Is Suzhou Anjie Technology's Balance Sheet?

According to the last reported balance sheet, Suzhou Anjie Technology had liabilities of CN¥2.18b due within 12 months, and liabilities of CN¥224.3m due beyond 12 months. Offsetting this, it had CN¥1.95b in cash and CN¥1.28b in receivables that were due within 12 months. So it actually has CN¥832.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Anjie Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Suzhou Anjie Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Suzhou Anjie Technology saw its EBIT decline by 2.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Suzhou Anjie Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 most recent three years, Suzhou Anjie Technology recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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¥1.15b, as well as more liquid assets than liabilities. So is Suzhou Anjie Technology's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Suzhou Anjie Technology that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.