Here's Why Suzhou QingYue Optoelectronics Technology (SHSE:688496) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Suzhou QingYue Optoelectronics Technology Co., Ltd. (SHSE:688496) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Suzhou QingYue Optoelectronics Technology

How Much Debt Does Suzhou QingYue Optoelectronics Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Suzhou QingYue Optoelectronics Technology had CN¥398.0m of debt in September 2024, down from CN¥507.0m, one year before. However, it does have CN¥332.2m in cash offsetting this, leading to net debt of about CN¥65.7m.

A Look At Suzhou QingYue Optoelectronics Technology's Liabilities

The latest balance sheet data shows that Suzhou QingYue Optoelectronics Technology had liabilities of CN¥458.3m due within a year, and liabilities of CN¥190.7m falling due after that. Offsetting these obligations, it had cash of CN¥332.2m as well as receivables valued at CN¥269.1m due within 12 months. So it has liabilities totalling CN¥47.6m more than its cash and near-term receivables, combined.

This state of affairs indicates that Suzhou QingYue Optoelectronics Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥3.68b company is struggling for cash, we still think it's worth monitoring its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Suzhou QingYue Optoelectronics 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.

Over 12 months, Suzhou QingYue Optoelectronics Technology made a loss at the EBIT level, and saw its revenue drop to CN¥682m, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

While Suzhou QingYue Optoelectronics Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥112m 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. For example, we would not want to see a repeat of last year's loss of CN¥123m. So to be blunt we do think it is risky. 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. We've identified 2 warning signs with Suzhou QingYue Optoelectronics Technology (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.