Is Suzhou Sushi Testing GroupLtd (SZSE:300416) A Risky Investment?

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. Importantly, Suzhou Sushi Testing Group Co.,Ltd. (SZSE:300416) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Suzhou Sushi Testing GroupLtd

What Is Suzhou Sushi Testing GroupLtd's Net Debt?

As you can see below, at the end of March 2024, Suzhou Sushi Testing GroupLtd had CN¥999.5m of debt, up from CN¥864.7m a year ago. Click the image for more detail. However, it also had CN¥830.7m in cash, and so its net debt is CN¥168.7m.

How Strong Is Suzhou Sushi Testing GroupLtd's Balance Sheet?

According to the last reported balance sheet, Suzhou Sushi Testing GroupLtd had liabilities of CN¥1.34b due within 12 months, and liabilities of CN¥501.2m due beyond 12 months. Offsetting this, it had CN¥830.7m in cash and CN¥1.35b in receivables that were due within 12 months. So it actually has CN¥335.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Sushi Testing GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Suzhou Sushi Testing GroupLtd has a low net debt to EBITDA ratio of only 0.31. And its EBIT covers its interest expense a whopping 24.3 times over. So we're pretty relaxed about its super-conservative use of debt. The good news is that Suzhou Sushi Testing GroupLtd has increased its EBIT by 7.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Suzhou Sushi Testing GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Suzhou Sushi Testing GroupLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Based on what we've seen Suzhou Sushi Testing GroupLtd is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Suzhou Sushi Testing GroupLtd is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Suzhou Sushi Testing GroupLtd that you should be aware of before investing here.

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.

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