Does Suzhou Shijing Environmental TechnologyLtd (SZSE:301030) Have A 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 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 Shijing Environmental Technology Co.,Ltd. (SZSE:301030) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Suzhou Shijing Environmental TechnologyLtd

How Much Debt Does Suzhou Shijing Environmental TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Suzhou Shijing Environmental TechnologyLtd had debt of CN¥2.67b, up from CN¥1.78b in one year. However, it does have CN¥1.00b in cash offsetting this, leading to net debt of about CN¥1.67b.

A Look At Suzhou Shijing Environmental TechnologyLtd's Liabilities

According to the last reported balance sheet, Suzhou Shijing Environmental TechnologyLtd had liabilities of CN¥5.03b due within 12 months, and liabilities of CN¥1.38b due beyond 12 months. On the other hand, it had cash of CN¥1.00b and CN¥2.84b worth of receivables due within a year. So its liabilities total CN¥2.56b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Suzhou Shijing Environmental TechnologyLtd has a market capitalization of CN¥6.84b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Suzhou Shijing Environmental TechnologyLtd has a debt to EBITDA ratio of 4.4 and its EBIT covered its interest expense 5.0 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Importantly, Suzhou Shijing Environmental TechnologyLtd grew its EBIT by 89% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Suzhou Shijing Environmental 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. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Suzhou Shijing Environmental 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.

Our View

Suzhou Shijing Environmental TechnologyLtd's conversion of EBIT to free cash flow and net debt to EBITDA definitely weigh on it, in our esteem. But its EBIT growth rate tells a very different story, and suggests some resilience. We think that Suzhou Shijing Environmental TechnologyLtd's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. Case in point: We've spotted 2 warning signs for Suzhou Shijing Environmental TechnologyLtd you should be aware of.

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.