Health Check: How Prudently Does Suzhou Centec Communications (SHSE:688702) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Suzhou Centec Communications Co., Ltd. (SHSE:688702) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Suzhou Centec Communications

How Much Debt Does Suzhou Centec Communications Carry?

The image below, which you can click on for greater detail, shows that Suzhou Centec Communications had debt of CN¥378.5m at the end of March 2024, a reduction from CN¥767.4m over a year. But on the other hand it also has CN¥1.55b in cash, leading to a CN¥1.17b net cash position.

A Look At Suzhou Centec Communications' Liabilities

We can see from the most recent balance sheet that Suzhou Centec Communications had liabilities of CN¥712.5m falling due within a year, and liabilities of CN¥13.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.55b as well as receivables valued at CN¥83.8m due within 12 months. So it actually has CN¥907.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Centec Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Suzhou Centec Communications boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Suzhou Centec Communications can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Suzhou Centec Communications reported revenue of CN¥997m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Suzhou Centec Communications?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Suzhou Centec Communications lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥582m of cash and made a loss of CN¥41m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.17b. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Suzhou Centec Communications 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.

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