Suntar Environmental Technology (SHSE:688101) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Suntar Environmental Technology Co., Ltd. (SHSE:688101) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, 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.

Check out our latest analysis for Suntar Environmental Technology

How Much Debt Does Suntar Environmental Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Suntar Environmental Technology had CN¥89.2m of debt in March 2024, down from CN¥99.3m, one year before. However, its balance sheet shows it holds CN¥1.48b in cash, so it actually has CN¥1.39b net cash.

How Healthy Is Suntar Environmental Technology's Balance Sheet?

The latest balance sheet data shows that Suntar Environmental Technology had liabilities of CN¥1.19b due within a year, and liabilities of CN¥443.0m falling due after that. On the other hand, it had cash of CN¥1.48b and CN¥942.8m worth of receivables due within a year. So it actually has CN¥782.1m more liquid assets than total liabilities.

It's good to see that Suntar Environmental Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Suntar Environmental Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Suntar Environmental Technology has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Suntar Environmental Technology's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Suntar Environmental Technology 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. In the last three years, Suntar Environmental Technology created free cash flow amounting to 10% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Suntar Environmental Technology has CN¥1.39b in net cash and a decent-looking balance sheet. And we liked the look of last year's 36% year-on-year EBIT growth. So is Suntar Environmental Technology's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Suntar Environmental Technology (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.