Here's Why Suzhou Etron TechnologiesLtd (SHSE:603380) Can Manage Its Debt Responsibly

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. As with many other companies Suzhou Etron Technologies Co.,Ltd. (SHSE:603380) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Suzhou Etron TechnologiesLtd

What Is Suzhou Etron TechnologiesLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Suzhou Etron TechnologiesLtd had CN¥114.1m of debt in June 2024, down from CN¥159.4m, one year before. But it also has CN¥308.4m in cash to offset that, meaning it has CN¥194.2m net cash.

How Strong Is Suzhou Etron TechnologiesLtd's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Etron TechnologiesLtd had liabilities of CN¥859.4m falling due within a year, and liabilities of CN¥83.3m due beyond that. Offsetting this, it had CN¥308.4m in cash and CN¥460.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥173.6m.

Since publicly traded Suzhou Etron TechnologiesLtd shares are worth a total of CN¥3.73b, it seems unlikely that this level of liabilities would be a major 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, Suzhou Etron TechnologiesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Suzhou Etron TechnologiesLtd grew its EBIT by 2.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Suzhou Etron TechnologiesLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Suzhou Etron TechnologiesLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Suzhou Etron TechnologiesLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Suzhou Etron TechnologiesLtd has CN¥194.2m in net cash. And it also grew its EBIT by 2.9% over the last year. So we are not troubled with Suzhou Etron TechnologiesLtd's debt use. 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. For example - Suzhou Etron TechnologiesLtd has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.