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.' 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. We note that Suzhou Everbright Photonics Co., Ltd. (SHSE:688048) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Suzhou Everbright Photonics Carry?

As you can see below, at the end of September 2023, Suzhou Everbright Photonics had CN¥37.1m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.82b in cash to offset that, meaning it has CN¥1.78b net cash.

How Healthy Is Suzhou Everbright Photonics' Balance Sheet?

According to the last reported balance sheet, Suzhou Everbright Photonics had liabilities of CN¥232.5m due within 12 months, and liabilities of CN¥38.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.82b as well as receivables valued at CN¥247.1m due within 12 months. So it actually has CN¥1.80b more liquid assets than total liabilities.

This surplus suggests that Suzhou Everbright Photonics is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Suzhou Everbright Photonics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Suzhou Everbright Photonics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Suzhou Everbright Photonics had a loss before interest and tax, and actually shrunk its revenue by 33%, to CN¥287m. To be frank that doesn't bode well.

So How Risky Is Suzhou Everbright Photonics?

Although Suzhou Everbright Photonics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥2.0m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 3 warning signs for Suzhou Everbright Photonics you should be aware of, and 1 of them is significant.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.