Suntak TechnologyLtd (SZSE:002815) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Suntak Technology Co.,Ltd. (SZSE:002815) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Suntak TechnologyLtd

What Is Suntak TechnologyLtd's Debt?

As you can see below, at the end of September 2023, Suntak TechnologyLtd had CN¥1.86b of debt, up from CN¥1.53b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.68b in cash, so it actually has CN¥1.82b net cash.

How Healthy Is Suntak TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Suntak TechnologyLtd had liabilities of CN¥2.46b falling due within a year, and liabilities of CN¥1.95b due beyond that. Offsetting these obligations, it had cash of CN¥3.68b as well as receivables valued at CN¥1.56b due within 12 months. So it actually has CN¥824.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Suntak TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Suntak TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Suntak TechnologyLtd saw its EBIT decline by 6.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is Suntak TechnologyLtd'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. Suntak 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. Over the last three years, Suntak TechnologyLtd reported free cash flow worth 13% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Suntak TechnologyLtd has net cash of CN¥1.82b, as well as more liquid assets than liabilities. So we don't have any problem with Suntak TechnologyLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Suntak TechnologyLtd has 2 warning signs we think you should be aware of.

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.