Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Keda Technology Co.,Ltd (SHSE:603660) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Suzhou Keda TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Suzhou Keda TechnologyLtd had CN¥897.3m of debt in September 2024, down from CN¥1.10b, one year before. On the flip side, it has CN¥430.1m in cash leading to net debt of about CN¥467.3m.

How Strong Is Suzhou Keda TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Keda TechnologyLtd had liabilities of CN¥880.5m falling due within a year, and liabilities of CN¥613.8m due beyond that. On the other hand, it had cash of CN¥430.1m and CN¥773.1m worth of receivables due within a year. So it has liabilities totalling CN¥291.0m more than its cash and near-term receivables, combined.

Given Suzhou Keda TechnologyLtd has a market capitalization of CN¥3.77b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Suzhou Keda TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Suzhou Keda TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.4b, which is a fall of 7.6%. We would much prefer see growth.

Caveat Emptor

Importantly, Suzhou Keda TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥310m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥57m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Case in point: We've spotted 2 warning signs for Suzhou Keda TechnologyLtd you should be aware of.

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.