Suzhou Centec Communications (SHSE:688702) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Suzhou Centec Communications Co., Ltd. (SHSE:688702) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Suzhou Centec Communications

What Is Suzhou Centec Communications's Net Debt?

As you can see below, Suzhou Centec Communications had CN¥229.5m of debt at September 2024, down from CN¥1.14b a year prior. But on the other hand it also has CN¥1.53b in cash, leading to a CN¥1.30b net cash position.

How Strong Is Suzhou Centec Communications' Balance Sheet?

We can see from the most recent balance sheet that Suzhou Centec Communications had liabilities of CN¥527.3m falling due within a year, and liabilities of CN¥11.0m due beyond that. Offsetting this, it had CN¥1.53b in cash and CN¥147.2m in receivables that were due within 12 months. So it can boast CN¥1.14b 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. Simply put, the fact that Suzhou Centec Communications has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Suzhou Centec Communications made a loss at the EBIT level, and saw its revenue drop to CN¥968m, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Suzhou Centec Communications?

Statistically speaking companies that lose money are riskier than those that make money. 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¥153m of cash and made a loss of CN¥139m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.30b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Suzhou Centec Communications that 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.