Is Suzhou TZTEK Technology (SHSE:688003) A Risky Investment?

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.' 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. Importantly, Suzhou TZTEK Technology Co., Ltd (SHSE:688003) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Suzhou TZTEK Technology

What Is Suzhou TZTEK Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Suzhou TZTEK Technology had debt of CN¥407.9m, up from CN¥381.5m in one year. But it also has CN¥413.7m in cash to offset that, meaning it has CN¥5.71m net cash.

How Strong Is Suzhou TZTEK Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou TZTEK Technology had liabilities of CN¥1.03b due within 12 months and liabilities of CN¥360.8m due beyond that. Offsetting these obligations, it had cash of CN¥413.7m as well as receivables valued at CN¥480.1m due within 12 months. So it has liabilities totalling CN¥493.5m more than its cash and near-term receivables, combined.

Given Suzhou TZTEK Technology has a market capitalization of CN¥7.19b, 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, Suzhou TZTEK Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Suzhou TZTEK Technology has boosted its EBIT by 76%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Suzhou TZTEK Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Suzhou TZTEK Technology 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. Over the last three years, Suzhou TZTEK Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Suzhou TZTEK Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥5.71m. And we liked the look of last year's 76% year-on-year EBIT growth. So we don't have any problem with Suzhou TZTEK Technology's use of debt. 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 TZTEK Technology has 2 warning signs we think 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.