Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Suzhou Nanomicro Technology Co., Ltd. (SHSE:688690) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Suzhou Nanomicro Technology's Net Debt?
As you can see below, Suzhou Nanomicro Technology had CN¥198.9m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥338.0m in cash to offset that, meaning it has CN¥139.0m net cash.
How Strong Is Suzhou Nanomicro Technology's Balance Sheet?
The latest balance sheet data shows that Suzhou Nanomicro Technology had liabilities of CN¥235.4m due within a year, and liabilities of CN¥230.1m falling due after that. Offsetting these obligations, it had cash of CN¥338.0m as well as receivables valued at CN¥306.6m due within 12 months. So it can boast CN¥179.1m more liquid assets than total liabilities.
This surplus suggests that Suzhou Nanomicro Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Suzhou Nanomicro Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Suzhou Nanomicro Technology if management cannot prevent a repeat of the 47% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Suzhou Nanomicro Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Suzhou Nanomicro 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 Nanomicro Technology created free cash flow amounting to 7.0% of its EBIT, an uninspiring performance. 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 Suzhou Nanomicro Technology has net cash of CN¥139.0m, as well as more liquid assets than liabilities. So we are not troubled with Suzhou Nanomicro Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Suzhou Nanomicro Technology has 2 warning signs we think you should be aware of.
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.