Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Suzhou Everbright Photonics Co., Ltd. (SHSE:688048) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Suzhou Everbright Photonics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Suzhou Everbright Photonics had debt of CN¥98.3m, up from CN¥37.1m in one year. But on the other hand it also has CN¥1.33b in cash, leading to a CN¥1.23b net cash position.

How Healthy Is Suzhou Everbright Photonics' Balance Sheet?

We can see from the most recent balance sheet that Suzhou Everbright Photonics had liabilities of CN¥313.3m falling due within a year, and liabilities of CN¥46.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.33b as well as receivables valued at CN¥191.4m due within 12 months. So it can boast CN¥1.16b more liquid assets than total liabilities.

This excess liquidity suggests that Suzhou Everbright Photonics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any 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! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Suzhou Everbright Photonics 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 Everbright Photonics had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to CN¥274m. We would much prefer see growth.

So How Risky Is Suzhou Everbright Photonics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Suzhou Everbright Photonics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥160m and booked a CN¥133m accounting loss. With only CN¥1.23b on the balance sheet, it would appear that its going to need to raise capital again soon. 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. For instance, we've identified 1 warning sign for Suzhou Everbright Photonics that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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