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 HYC Technology Co.,Ltd. (SHSE:688001) does carry debt. But is this debt a concern to shareholders?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Suzhou HYC TechnologyLtd

What Is Suzhou HYC TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Suzhou HYC TechnologyLtd had debt of CN¥727.2m, up from none in one year. However, its balance sheet shows it holds CN¥1.63b in cash, so it actually has CN¥899.8m net cash.

How Healthy Is Suzhou HYC TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Suzhou HYC TechnologyLtd had liabilities of CN¥761.2m falling due within a year, and liabilities of CN¥776.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.63b as well as receivables valued at CN¥1.08b due within 12 months. So it can boast CN¥1.17b more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou HYC TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Suzhou HYC TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Suzhou HYC TechnologyLtd grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Suzhou HYC TechnologyLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Suzhou HYC TechnologyLtd 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. Over the last three years, Suzhou HYC TechnologyLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Suzhou HYC TechnologyLtd has net cash of CN¥899.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% over the last year. So we don't have any problem with Suzhou HYC TechnologyLtd's use of debt. 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 instance, we've identified 3 warning signs for Suzhou HYC TechnologyLtd (1 is a bit concerning) 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.