The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Suzhou Centec Communications Co., Ltd. (SHSE:688702) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Suzhou Centec Communications Carry?

The image below, which you can click on for greater detail, shows that Suzhou Centec Communications had debt of CN¥379.9m at the end of March 2024, a reduction from CN¥767.4m over a year. However, its balance sheet shows it holds CN¥1.55b in cash, so it actually has CN¥1.17b net cash.

A Look At Suzhou Centec Communications' Liabilities

According to the last reported balance sheet, Suzhou Centec Communications had liabilities of CN¥712.5m due within 12 months, and liabilities of CN¥13.0m due beyond 12 months. Offsetting this, it had CN¥1.55b in cash and CN¥83.8m in receivables that were due within 12 months. So it actually has CN¥907.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Centec Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Suzhou Centec Communications 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 ultimately the future profitability of the business will decide if Suzhou Centec Communications 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.

In the last year Suzhou Centec Communications wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥997m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Suzhou Centec Communications?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Suzhou Centec Communications lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥582m of cash and made a loss of CN¥41m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.17b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Suzhou Centec Communications .

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.