Suzhou Alton Electrical & Mechanical Industry (SZSE:301187) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Suzhou Alton Electrical & Mechanical Industry Co., Ltd. (SZSE:301187) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Suzhou Alton Electrical & Mechanical Industry

How Much Debt Does Suzhou Alton Electrical & Mechanical Industry Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Suzhou Alton Electrical & Mechanical Industry had debt of CN¥372.7m, up from CN¥206.3m in one year. However, its balance sheet shows it holds CN¥1.30b in cash, so it actually has CN¥925.9m net cash.

A Look At Suzhou Alton Electrical & Mechanical Industry's Liabilities

Zooming in on the latest balance sheet data, we can see that Suzhou Alton Electrical & Mechanical Industry had liabilities of CN¥932.5m due within 12 months and liabilities of CN¥117.4m due beyond that. On the other hand, it had cash of CN¥1.30b and CN¥313.8m worth of receivables due within a year. So it actually has CN¥562.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Alton Electrical & Mechanical Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Suzhou Alton Electrical & Mechanical Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Suzhou Alton Electrical & Mechanical Industry grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Suzhou Alton Electrical & Mechanical Industry can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Suzhou Alton Electrical & Mechanical Industry 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. During the last three years, Suzhou Alton Electrical & Mechanical Industry 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 Suzhou Alton Electrical & Mechanical Industry has CN¥925.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 83% year-on-year EBIT growth. So we don't have any problem with Suzhou Alton Electrical & Mechanical Industry's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Suzhou Alton Electrical & Mechanical Industry (at least 1 which is a bit unpleasant) , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com