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. As with many other companies Suzhou Goldengreen Technologies Ltd. (SZSE:002808) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Goldengreen Technologies

What Is Suzhou Goldengreen Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Suzhou Goldengreen Technologies had CN¥56.7m of debt in September 2022, down from CN¥82.9m, one year before. But it also has CN¥186.4m in cash to offset that, meaning it has CN¥129.7m net cash.

How Strong Is Suzhou Goldengreen Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Goldengreen Technologies had liabilities of CN¥138.3m due within 12 months and liabilities of CN¥3.23m due beyond that. On the other hand, it had cash of CN¥186.4m and CN¥97.5m worth of receivables due within a year. So it can boast CN¥142.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Goldengreen Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Suzhou Goldengreen Technologies 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 it is Suzhou Goldengreen Technologies'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.

In the last year Suzhou Goldengreen Technologies had a loss before interest and tax, and actually shrunk its revenue by 50%, to CN¥188m. To be frank that doesn't bode well.

So How Risky Is Suzhou Goldengreen Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Suzhou Goldengreen Technologies had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥32m and booked a CN¥151m accounting loss. Given it only has net cash of CN¥129.7m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Suzhou Goldengreen Technologies .

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.