Supcon TechnologyLtd (SHSE:688777) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Supcon Technology Co.,Ltd (SHSE:688777) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Supcon TechnologyLtd

What Is Supcon TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that Supcon TechnologyLtd had debt of CN¥307.2m at the end of September 2024, a reduction from CN¥1.01b over a year. But on the other hand it also has CN¥5.31b in cash, leading to a CN¥5.00b net cash position.

How Healthy Is Supcon TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Supcon TechnologyLtd had liabilities of CN¥7.15b due within a year, and liabilities of CN¥110.3m falling due after that. Offsetting these obligations, it had cash of CN¥5.31b as well as receivables valued at CN¥4.69b due within 12 months. So it actually has CN¥2.74b more liquid assets than total liabilities.

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

And we also note warmly that Supcon TechnologyLtd grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Supcon TechnologyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Supcon TechnologyLtd 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 TechnologyLtd created free cash flow amounting to 5.2% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Supcon TechnologyLtd has CN¥5.00b in net cash and a decent-looking balance sheet. And we liked the look of last year's 17% year-on-year EBIT growth. So we are not troubled with Supcon TechnologyLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Supcon TechnologyLtd 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.