Suzhou Nanomicro Technology (SHSE:688690) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Nanomicro Technology Co., Ltd. (SHSE:688690) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Suzhou Nanomicro Technology

What Is Suzhou Nanomicro Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Suzhou Nanomicro Technology had CN¥198.9m in debt in March 2024; about the same as the year before. But it also has CN¥563.7m in cash to offset that, meaning it has CN¥364.8m net cash.

How Strong Is Suzhou Nanomicro Technology's Balance Sheet?

According to the last reported balance sheet, Suzhou Nanomicro Technology had liabilities of CN¥235.4m due within 12 months, and liabilities of CN¥230.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥563.7m as well as receivables valued at CN¥306.6m due within 12 months. So it actually has CN¥404.8m more liquid assets than total liabilities.

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

In fact Suzhou Nanomicro Technology's saving grace is its low debt levels, because its EBIT has tanked 65% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Suzhou Nanomicro Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Suzhou Nanomicro 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, Suzhou Nanomicro Technology created free cash flow amounting to 7.5% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Suzhou Nanomicro Technology has CN¥364.8m in net cash and a decent-looking balance sheet. So we are not troubled with Suzhou Nanomicro Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Suzhou Nanomicro Technology has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.