Suzhou Good-Ark Electronics (SZSE:002079) Seems To Use Debt Quite Sensibly

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. As with many other companies Suzhou Good-Ark Electronics Co., Ltd. (SZSE:002079) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Suzhou Good-Ark Electronics

What Is Suzhou Good-Ark Electronics's Net Debt?

As you can see below, at the end of September 2024, Suzhou Good-Ark Electronics had CN¥656.5m of debt, up from CN¥183.3m a year ago. Click the image for more detail. But it also has CN¥715.0m in cash to offset that, meaning it has CN¥58.5m net cash.

How Strong Is Suzhou Good-Ark Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Good-Ark Electronics had liabilities of CN¥1.18b due within 12 months and liabilities of CN¥206.0m due beyond that. Offsetting these obligations, it had cash of CN¥715.0m as well as receivables valued at CN¥1.49b due within 12 months. So it can boast CN¥816.0m more liquid assets than total liabilities.

This surplus suggests that Suzhou Good-Ark Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Suzhou Good-Ark Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Suzhou Good-Ark Electronics has seen its EBIT plunge 10% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Suzhou Good-Ark Electronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Suzhou Good-Ark Electronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Suzhou Good-Ark Electronics burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Suzhou Good-Ark Electronics has CN¥58.5m in net cash and a decent-looking balance sheet. So we are not troubled with Suzhou Good-Ark Electronics's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Suzhou Good-Ark Electronics you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.