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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Suzhou UIGreen Micro&Nano Technologies Co.,Ltd (SHSE:688661) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Suzhou UIGreen Micro&Nano TechnologiesLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Suzhou UIGreen Micro&Nano TechnologiesLtd had debt of CN¥41.8m, up from none in one year. But it also has CN¥762.7m in cash to offset that, meaning it has CN¥720.9m net cash.
How Strong Is Suzhou UIGreen Micro&Nano TechnologiesLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Suzhou UIGreen Micro&Nano TechnologiesLtd had liabilities of CN¥159.9m due within 12 months and liabilities of CN¥15.9m due beyond that. Offsetting these obligations, it had cash of CN¥762.7m as well as receivables valued at CN¥112.0m due within 12 months. So it can boast CN¥699.0m more liquid assets than total liabilities.
This excess liquidity suggests that Suzhou UIGreen Micro&Nano TechnologiesLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Suzhou UIGreen Micro&Nano TechnologiesLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Suzhou UIGreen Micro&Nano TechnologiesLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Suzhou UIGreen Micro&Nano TechnologiesLtd reported revenue of CN¥339m, which is a gain of 41%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Suzhou UIGreen Micro&Nano TechnologiesLtd?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Suzhou UIGreen Micro&Nano TechnologiesLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥123m of cash and made a loss of CN¥19m. With only CN¥720.9m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Suzhou UIGreen Micro&Nano TechnologiesLtd may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Suzhou UIGreen Micro&Nano TechnologiesLtd is showing 1 warning sign in our investment analysis , you should know about...
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.