Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Surfilter Network Technology Co., Ltd. (SZSE:300311) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Surfilter Network Technology
How Much Debt Does Surfilter Network Technology Carry?
The image below, which you can click on for greater detail, shows that Surfilter Network Technology had debt of CN¥19.5m at the end of September 2023, a reduction from CN¥50.0m over a year. However, its balance sheet shows it holds CN¥187.7m in cash, so it actually has CN¥168.2m net cash.
How Strong Is Surfilter Network Technology's Balance Sheet?
The latest balance sheet data shows that Surfilter Network Technology had liabilities of CN¥577.0m due within a year, and liabilities of CN¥74.9m falling due after that. Offsetting these obligations, it had cash of CN¥187.7m as well as receivables valued at CN¥301.4m due within 12 months. So its liabilities total CN¥162.8m more than the combination of its cash and short-term receivables.
Of course, Surfilter Network Technology has a market capitalization of CN¥4.73b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Surfilter Network Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Surfilter Network Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Surfilter Network Technology had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥537m. That makes us nervous, to say the least.
So How Risky Is Surfilter Network Technology?
Although Surfilter Network Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥89m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that Surfilter Network Technology is showing 1 warning sign in our investment analysis , you should know about...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.