Warren Buffett famously said, '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. As with many other companies Suzhou Centec Communications Co., Ltd. (SHSE:688702) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Suzhou Centec Communications Carry?

As you can see below, Suzhou Centec Communications had CN¥354.8m of debt at June 2024, down from CN¥978.3m a year prior. But on the other hand it also has CN¥1.57b in cash, leading to a CN¥1.21b net cash position.

How Strong Is Suzhou Centec Communications' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou Centec Communications had liabilities of CN¥635.8m due within 12 months and liabilities of CN¥10.8m due beyond that. On the other hand, it had cash of CN¥1.57b and CN¥128.2m worth of receivables due within a year. So it can boast CN¥1.05b more liquid assets than total liabilities.

This surplus suggests that Suzhou Centec Communications has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suzhou Centec Communications has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Centec Communications's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Suzhou Centec Communications made a loss at the EBIT level, and saw its revenue drop to CN¥926m, which is a fall of 13%. We would much prefer see growth.

So How Risky Is Suzhou Centec Communications?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Suzhou Centec Communications had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥510m and booked a CN¥112m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.21b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Suzhou Centec Communications that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.