David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Suzhou Veichi Electric Co., Ltd. (SHSE:688698) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Suzhou Veichi Electric Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Suzhou Veichi Electric had CN¥21.4m of debt, an increase on CN¥4.53m, over one year. But it also has CN¥254.6m in cash to offset that, meaning it has CN¥233.2m net cash.
A Look At Suzhou Veichi Electric's Liabilities
The latest balance sheet data shows that Suzhou Veichi Electric had liabilities of CN¥687.9m due within a year, and liabilities of CN¥30.5m falling due after that. On the other hand, it had cash of CN¥254.6m and CN¥798.8m worth of receivables due within a year. So it can boast CN¥335.0m more liquid assets than total liabilities.
This surplus suggests that Suzhou Veichi Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Suzhou Veichi Electric boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Suzhou Veichi Electric grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Suzhou Veichi Electric'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Suzhou Veichi Electric 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. During the last three years, Suzhou Veichi Electric burned a lot of cash. 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 it is always sensible to investigate a company's debt, in this case Suzhou Veichi Electric has CN¥233.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 35% over the last year. So we don't have any problem with Suzhou Veichi Electric's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Suzhou Veichi Electric (of which 1 can't be ignored!) 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.