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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Suzhou HYC Technology Co.,Ltd. (SHSE:688001) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Suzhou HYC TechnologyLtd
What Is Suzhou HYC TechnologyLtd's Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Suzhou HYC TechnologyLtd had debt of CN¥757.9m, up from CN¥723.4m in one year. But it also has CN¥1.26b in cash to offset that, meaning it has CN¥500.6m net cash.
How Strong Is Suzhou HYC TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Suzhou HYC TechnologyLtd had liabilities of CN¥716.6m due within a year, and liabilities of CN¥827.6m falling due after that. Offsetting these obligations, it had cash of CN¥1.26b as well as receivables valued at CN¥1.23b due within 12 months. So it can boast CN¥948.3m more liquid assets than total liabilities.
This surplus suggests that Suzhou HYC TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Suzhou HYC TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Suzhou HYC TechnologyLtd's load is not too heavy, because its EBIT was down 26% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
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¥500.6m, as well as more liquid assets than liabilities. So while Suzhou HYC TechnologyLtd does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Suzhou HYC TechnologyLtd you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.