We Think Sanan OptoelectronicsLtd (SHSE:600703) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Sanan Optoelectronics Co.,Ltd (SHSE:600703) does have debt on its balance sheet. 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 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, 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.

Check out our latest analysis for Sanan OptoelectronicsLtd

How Much Debt Does Sanan OptoelectronicsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sanan OptoelectronicsLtd had CN¥11.6b of debt, an increase on CN¥9.68b, over one year. However, because it has a cash reserve of CN¥9.00b, its net debt is less, at about CN¥2.56b.

A Look At Sanan OptoelectronicsLtd's Liabilities

According to the last reported balance sheet, Sanan OptoelectronicsLtd had liabilities of CN¥13.1b due within 12 months, and liabilities of CN¥9.17b due beyond 12 months. Offsetting these obligations, it had cash of CN¥9.00b as well as receivables valued at CN¥6.22b due within 12 months. So its liabilities total CN¥7.04b more than the combination of its cash and short-term receivables.

Of course, Sanan OptoelectronicsLtd has a market capitalization of CN¥61.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sanan OptoelectronicsLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sanan OptoelectronicsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to CN¥16b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Sanan OptoelectronicsLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥891m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of CN¥2.0b and a profit of CN¥441m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. To that end, you should be aware of the 1 warning sign we've spotted with Sanan OptoelectronicsLtd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.