Would Sichuan Etrol Technologies (SZSE:300370) Be Better Off With Less Debt?

Warren Buffett famously said, '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. As with many other companies Sichuan Etrol Technologies Co., Ltd. (SZSE:300370) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sichuan Etrol Technologies

What Is Sichuan Etrol Technologies's Net Debt?

As you can see below, at the end of September 2024, Sichuan Etrol Technologies had CN¥506.8m of debt, up from CN¥437.5m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥79.5m, its net debt is less, at about CN¥427.3m.

A Look At Sichuan Etrol Technologies' Liabilities

According to the last reported balance sheet, Sichuan Etrol Technologies had liabilities of CN¥388.1m due within 12 months, and liabilities of CN¥409.5m due beyond 12 months. Offsetting this, it had CN¥79.5m in cash and CN¥293.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥424.6m more than its cash and near-term receivables, combined.

Since publicly traded Sichuan Etrol Technologies shares are worth a total of CN¥4.93b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sichuan Etrol Technologies 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.

In the last year Sichuan Etrol Technologies's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Sichuan Etrol Technologies produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥80m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥76m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Sichuan Etrol Technologies .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.