GuangDong Suqun New MaterialLtd (SZSE:301489) 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. Importantly, GuangDong Suqun New Material Co.,Ltd. (SZSE:301489) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 GuangDong Suqun New MaterialLtd

What Is GuangDong Suqun New MaterialLtd's Debt?

As you can see below, GuangDong Suqun New MaterialLtd had CN¥66.9m of debt at June 2024, down from CN¥197.4m a year prior. But on the other hand it also has CN¥426.2m in cash, leading to a CN¥359.3m net cash position.

How Strong Is GuangDong Suqun New MaterialLtd's Balance Sheet?

According to the last reported balance sheet, GuangDong Suqun New MaterialLtd had liabilities of CN¥275.4m due within 12 months, and liabilities of CN¥20.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥426.2m as well as receivables valued at CN¥200.1m due within 12 months. So it actually has CN¥330.5m more liquid assets than total liabilities.

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

On the other hand, GuangDong Suqun New MaterialLtd's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 GuangDong Suqun New MaterialLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. GuangDong Suqun New MaterialLtd 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. During the last three years, GuangDong Suqun New MaterialLtd burned a lot of cash. 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 GuangDong Suqun New MaterialLtd has CN¥359.3m in net cash and a decent-looking balance sheet. So we are not troubled with GuangDong Suqun New MaterialLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for GuangDong Suqun New MaterialLtd you should be aware of, and 1 of them is concerning.

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.