Suzhou Longway Eletronic Machinery (SZSE:301202) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Suzhou Longway Eletronic Machinery Co., Ltd (SZSE:301202) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Suzhou Longway Eletronic Machinery

How Much Debt Does Suzhou Longway Eletronic Machinery Carry?

You can click the graphic below for the historical numbers, but it shows that Suzhou Longway Eletronic Machinery had CN¥116.6m of debt in June 2024, down from CN¥275.2m, one year before. But it also has CN¥617.1m in cash to offset that, meaning it has CN¥500.5m net cash.

How Strong Is Suzhou Longway Eletronic Machinery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Longway Eletronic Machinery had liabilities of CN¥428.3m due within 12 months and liabilities of CN¥20.0m due beyond that. Offsetting these obligations, it had cash of CN¥617.1m as well as receivables valued at CN¥331.2m due within 12 months. So it actually has CN¥500.1m more liquid assets than total liabilities.

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

On the other hand, Suzhou Longway Eletronic Machinery saw its EBIT drop by 5.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Suzhou Longway Eletronic Machinery'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. Suzhou Longway Eletronic Machinery 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. During the last three years, Suzhou Longway Eletronic Machinery produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Suzhou Longway Eletronic Machinery has net cash of CN¥500.5m, as well as more liquid assets than liabilities. So we don't have any problem with Suzhou Longway Eletronic Machinery's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Suzhou Longway Eletronic Machinery that you should be aware of before investing here.

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.