These 4 Measures Indicate That SUPCON Technology (SHSE:688777) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, SUPCON Technology Co., Ltd. (SHSE:688777) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SUPCON Technology

What Is SUPCON Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that SUPCON Technology had CN¥208.0m in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥6.48b in cash, leading to a CN¥6.27b net cash position.

How Healthy Is SUPCON Technology's Balance Sheet?

According to the last reported balance sheet, SUPCON Technology had liabilities of CN¥7.36b due within 12 months, and liabilities of CN¥105.0m due beyond 12 months. Offsetting this, it had CN¥6.48b in cash and CN¥4.33b in receivables that were due within 12 months. So it can boast CN¥3.35b more liquid assets than total liabilities.

This surplus suggests that SUPCON Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SUPCON Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

While SUPCON Technology doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SUPCON Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SUPCON 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. In the last three years, SUPCON Technology basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SUPCON Technology has net cash of CN¥6.27b, as well as more liquid assets than liabilities. So we are not troubled with SUPCON Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with SUPCON Technology (including 1 which makes us a bit uncomfortable) .

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.

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.