Does Suzhou Huaya Intelligence Technology (SZSE:003043) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Suzhou Huaya Intelligence Technology Co., Ltd. (SZSE:003043) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Suzhou Huaya Intelligence Technology

What Is Suzhou Huaya Intelligence Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Suzhou Huaya Intelligence Technology had debt of CN¥253.9m, up from CN¥234.1m in one year. But on the other hand it also has CN¥771.6m in cash, leading to a CN¥517.7m net cash position.

A Look At Suzhou Huaya Intelligence Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Suzhou Huaya Intelligence Technology had liabilities of CN¥126.2m due within 12 months and liabilities of CN¥285.4m due beyond that. Offsetting this, it had CN¥771.6m in cash and CN¥181.7m in receivables that were due within 12 months. So it actually has CN¥541.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Huaya Intelligence Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Suzhou Huaya Intelligence Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Suzhou Huaya Intelligence Technology's load is not too heavy, because its EBIT was down 29% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Suzhou Huaya Intelligence Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Suzhou Huaya Intelligence 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 Huaya Intelligence 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 Huaya Intelligence Technology has net cash of CN¥517.7m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Suzhou Huaya Intelligence Technology's 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. We've identified 1 warning sign with Suzhou Huaya Intelligence Technology , and understanding them should be part of your investment process.

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.