These 4 Measures Indicate That Suzhou Nanomicro Technology (SHSE:688690) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. As with many other companies Suzhou Nanomicro Technology Co., Ltd. (SHSE:688690) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Suzhou Nanomicro Technology

How Much Debt Does Suzhou Nanomicro Technology Carry?

The image below, which you can click on for greater detail, shows that Suzhou Nanomicro Technology had debt of CN¥116.9m at the end of September 2024, a reduction from CN¥157.6m over a year. However, it does have CN¥303.2m in cash offsetting this, leading to net cash of CN¥186.3m.

How Healthy Is Suzhou Nanomicro Technology's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Nanomicro Technology had liabilities of CN¥314.7m falling due within a year, and liabilities of CN¥90.9m due beyond that. Offsetting these obligations, it had cash of CN¥303.2m as well as receivables valued at CN¥360.6m due within 12 months. So it can boast CN¥258.2m 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.

But the bad news is that Suzhou Nanomicro Technology has seen its EBIT plunge 11% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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. Suzhou Nanomicro Technology 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. Over the last three years, Suzhou Nanomicro Technology recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Suzhou Nanomicro Technology has net cash of CN¥186.3m, as well as more liquid assets than liabilities. So we are not troubled with Suzhou Nanomicro Technology's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Suzhou Nanomicro Technology's earnings per share history for free.

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.