Here's Why Suwen Electric Energy TechnologyLtd (SZSE:300982) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Suwen Electric Energy Technology Co.,Ltd. (SZSE:300982) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Suwen Electric Energy TechnologyLtd

What Is Suwen Electric Energy TechnologyLtd's Debt?

The chart below, which you can click on for greater detail, shows that Suwen Electric Energy TechnologyLtd had CN¥159.1m in debt in March 2024; about the same as the year before. However, it does have CN¥1.42b in cash offsetting this, leading to net cash of CN¥1.27b.

A Look At Suwen Electric Energy TechnologyLtd's Liabilities

The latest balance sheet data shows that Suwen Electric Energy TechnologyLtd had liabilities of CN¥1.56b due within a year, and liabilities of CN¥22.7m falling due after that. Offsetting this, it had CN¥1.42b in cash and CN¥2.07b in receivables that were due within 12 months. So it actually has CN¥1.91b more liquid assets than total liabilities.

This surplus liquidity suggests that Suwen Electric Energy TechnologyLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Suwen Electric Energy TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Suwen Electric Energy TechnologyLtd if management cannot prevent a repeat of the 83% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Suwen Electric Energy TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Suwen Electric Energy TechnologyLtd 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, Suwen Electric Energy TechnologyLtd 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 it is always sensible to investigate a company's debt, in this case Suwen Electric Energy TechnologyLtd has CN¥1.27b in net cash and a decent-looking balance sheet. So we are not troubled with Suwen Electric Energy TechnologyLtd's debt use. 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. For example Suwen Electric Energy TechnologyLtd has 4 warning signs (and 1 which is potentially serious) 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.

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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.