Is Surfilter Network Technology (SZSE:300311) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Surfilter Network Technology Co., Ltd. (SZSE:300311) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Surfilter Network Technology

How Much Debt Does Surfilter Network Technology Carry?

As you can see below, Surfilter Network Technology had CN¥19.5m of debt at September 2023, down from CN¥50.0m a year prior. However, it does have CN¥187.7m in cash offsetting this, leading to net cash of CN¥168.2m.

How Strong Is Surfilter Network Technology's Balance Sheet?

The latest balance sheet data shows that Surfilter Network Technology had liabilities of CN¥577.0m due within a year, and liabilities of CN¥74.9m falling due after that. On the other hand, it had cash of CN¥187.7m and CN¥301.4m worth of receivables due within a year. So its liabilities total CN¥162.8m more than the combination of its cash and short-term receivables.

Given Surfilter Network Technology has a market capitalization of CN¥3.68b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Surfilter Network Technology boasts net cash, 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 you can't view debt in total isolation; since Surfilter Network Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Surfilter Network Technology had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥537m. That makes us nervous, to say the least.

So How Risky Is Surfilter Network Technology?

While Surfilter Network Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥89m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Surfilter Network Technology is showing 1 warning sign 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.