We Think Suzhou Hengmingda Electronic Technology (SZSE:002947) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Suzhou Hengmingda Electronic Technology Co., Ltd. (SZSE:002947) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Suzhou Hengmingda Electronic Technology's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Suzhou Hengmingda Electronic Technology had debt of CN¥68.9m, up from CN¥59.7m in one year. But on the other hand it also has CN¥1.68b in cash, leading to a CN¥1.62b net cash position.

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

The latest balance sheet data shows that Suzhou Hengmingda Electronic Technology had liabilities of CN¥708.9m due within a year, and liabilities of CN¥79.5m falling due after that. On the other hand, it had cash of CN¥1.68b and CN¥1.24b worth of receivables due within a year. So it can boast CN¥2.14b more liquid assets than total liabilities.

This surplus suggests that Suzhou Hengmingda Electronic Technology is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Suzhou Hengmingda Electronic Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Suzhou Hengmingda Electronic Technology

On top of that, Suzhou Hengmingda Electronic Technology grew its EBIT by 82% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Suzhou Hengmingda Electronic Technology will need earnings to service that debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Suzhou Hengmingda Electronic Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Suzhou Hengmingda Electronic Technology's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Suzhou Hengmingda Electronic Technology has CN¥1.62b in net cash and a decent-looking balance sheet. And we liked the look of last year's 82% year-on-year EBIT growth. So we don't think Suzhou Hengmingda Electronic Technology's use of debt is risky. 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 instance, we've identified 2 warning signs for Suzhou Hengmingda Electronic Technology (1 is a bit unpleasant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.