Suzhou SLAC Precision EquipmentLtd (SZSE:300382) Has A Somewhat Strained 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 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. Importantly, Suzhou SLAC Precision Equipment CO.,Ltd. (SZSE:300382) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Suzhou SLAC Precision EquipmentLtd

What Is Suzhou SLAC Precision EquipmentLtd's Net Debt?

As you can see below, at the end of June 2024, Suzhou SLAC Precision EquipmentLtd had CN¥1.68b of debt, up from CN¥1.30b a year ago. Click the image for more detail. However, it does have CN¥673.7m in cash offsetting this, leading to net debt of about CN¥1.01b.

How Strong Is Suzhou SLAC Precision EquipmentLtd's Balance Sheet?

The latest balance sheet data shows that Suzhou SLAC Precision EquipmentLtd had liabilities of CN¥1.14b due within a year, and liabilities of CN¥1.26b falling due after that. Offsetting this, it had CN¥673.7m in cash and CN¥765.4m in receivables that were due within 12 months. So its liabilities total CN¥965.1m more than the combination of its cash and short-term receivables.

Suzhou SLAC Precision EquipmentLtd has a market capitalization of CN¥4.74b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 1.8 times and a disturbingly high net debt to EBITDA ratio of 6.1 hit our confidence in Suzhou SLAC Precision EquipmentLtd like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Suzhou SLAC Precision EquipmentLtd's EBIT was down 64% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Suzhou SLAC Precision EquipmentLtd will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Suzhou SLAC Precision EquipmentLtd 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.

Our View

On the face of it, Suzhou SLAC Precision EquipmentLtd's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to handle its total liabilities isn't such a worry. Overall, it seems to us that Suzhou SLAC Precision EquipmentLtd's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Suzhou SLAC Precision EquipmentLtd (including 2 which are a bit unpleasant) .

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.