We Think Suzhou Kematek (SZSE:301611) Can Stay On Top Of Its Debt

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. We note that Suzhou Kematek, Inc. (SZSE:301611) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Suzhou Kematek

What Is Suzhou Kematek's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Suzhou Kematek had debt of CN¥291.3m, up from CN¥259.8m in one year. But on the other hand it also has CN¥669.7m in cash, leading to a CN¥378.5m net cash position.

How Healthy Is Suzhou Kematek's Balance Sheet?

According to the last reported balance sheet, Suzhou Kematek had liabilities of CN¥401.0m due within 12 months, and liabilities of CN¥288.2m due beyond 12 months. On the other hand, it had cash of CN¥669.7m and CN¥456.4m worth of receivables due within a year. So it actually has CN¥437.0m more liquid assets than total liabilities.

Having regard to Suzhou Kematek's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥23.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Suzhou Kematek has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Suzhou Kematek grew its EBIT by 215% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Suzhou Kematek'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Suzhou Kematek has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Suzhou Kematek saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Suzhou Kematek has CN¥378.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 215% over the last year. So we are not troubled with Suzhou Kematek's debt use. 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. Be aware that Suzhou Kematek is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.