Would Suzhou QingYue Optoelectronics Technology (SHSE:688496) Be Better Off With Less 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Suzhou QingYue Optoelectronics Technology

How Much Debt Does Suzhou QingYue Optoelectronics Technology Carry?

As you can see below, Suzhou QingYue Optoelectronics Technology had CN¥507.0m of debt at September 2023, down from CN¥643.7m a year prior. However, it also had CN¥460.3m in cash, and so its net debt is CN¥46.7m.

How Strong Is Suzhou QingYue Optoelectronics Technology's Balance Sheet?

We can see from the most recent balance sheet that Suzhou QingYue Optoelectronics Technology had liabilities of CN¥602.8m falling due within a year, and liabilities of CN¥228.5m due beyond that. Offsetting these obligations, it had cash of CN¥460.3m as well as receivables valued at CN¥286.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥84.3m.

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 it's very unlikely that the CN¥7.04b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Suzhou QingYue Optoelectronics Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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.

In the last year Suzhou QingYue Optoelectronics Technology had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥827m. We would much prefer see growth.

Caveat Emptor

Not only did Suzhou QingYue Optoelectronics Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥73m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥318m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Be aware that Suzhou QingYue Optoelectronics Technology is showing 2 warning signs in our investment analysis , you should know about...

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.