Here's Why Suzhou Chunqiu Electronic Technology (SHSE:603890) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Suzhou Chunqiu Electronic Technology Co., Ltd. (SHSE:603890) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Chunqiu Electronic Technology

What Is Suzhou Chunqiu Electronic Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Suzhou Chunqiu Electronic Technology had CN¥1.49b of debt, an increase on CN¥1.40b, over one year. On the flip side, it has CN¥1.13b in cash leading to net debt of about CN¥365.6m.

How Strong Is Suzhou Chunqiu Electronic Technology's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Chunqiu Electronic Technology had liabilities of CN¥2.28b falling due within a year, and liabilities of CN¥871.8m due beyond that. Offsetting this, it had CN¥1.13b in cash and CN¥1.47b in receivables that were due within 12 months. So its liabilities total CN¥545.9m more than the combination of its cash and short-term receivables.

Given Suzhou Chunqiu Electronic Technology has a market capitalization of CN¥5.83b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Suzhou Chunqiu Electronic Technology has net debt of just 0.88 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. Better yet, Suzhou Chunqiu Electronic Technology grew its EBIT by 1,705% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Suzhou Chunqiu Electronic Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Suzhou Chunqiu Electronic Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Suzhou Chunqiu Electronic Technology's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Looking at all the aforementioned factors together, it strikes us that Suzhou Chunqiu Electronic Technology can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. For example - Suzhou Chunqiu Electronic Technology has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.