Is China-Singapore Suzhou Industrial Park Development Group (SHSE:601512) A Risky Investment?

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.' 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, China-Singapore Suzhou Industrial Park Development Group Co., Ltd. (SHSE:601512) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China-Singapore Suzhou Industrial Park Development Group

How Much Debt Does China-Singapore Suzhou Industrial Park Development Group Carry?

You can click the graphic below for the historical numbers, but it shows that China-Singapore Suzhou Industrial Park Development Group had CN¥8.32b of debt in December 2023, down from CN¥9.21b, one year before. However, because it has a cash reserve of CN¥3.87b, its net debt is less, at about CN¥4.45b.

How Strong Is China-Singapore Suzhou Industrial Park Development Group's Balance Sheet?

We can see from the most recent balance sheet that China-Singapore Suzhou Industrial Park Development Group had liabilities of CN¥8.30b falling due within a year, and liabilities of CN¥7.63b due beyond that. On the other hand, it had cash of CN¥3.87b and CN¥2.47b worth of receivables due within a year. So it has liabilities totalling CN¥9.59b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥12.4b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

China-Singapore Suzhou Industrial Park Development Group's net debt to EBITDA ratio of about 2.3 suggests only moderate use of debt. And its strong interest cover of 1k times, makes us even more comfortable. Importantly, China-Singapore Suzhou Industrial Park Development Group's EBIT fell a jaw-dropping 39% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 China-Singapore Suzhou Industrial Park Development Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, China-Singapore Suzhou Industrial Park Development Group reported free cash flow worth 12% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

We'd go so far as to say China-Singapore Suzhou Industrial Park Development Group's EBIT growth rate was disappointing. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Overall, we think it's fair to say that China-Singapore Suzhou Industrial Park Development Group has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the 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. For example - China-Singapore Suzhou Industrial Park Development Group has 1 warning sign we think you should be aware of.

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.