Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Suzhou Keda Technology Co.,Ltd (SHSE:603660) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Suzhou Keda TechnologyLtd
What Is Suzhou Keda TechnologyLtd's Debt?
As you can see below, at the end of September 2023, Suzhou Keda TechnologyLtd had CN¥1.10b of debt, up from CN¥916.0m a year ago. Click the image for more detail. On the flip side, it has CN¥660.3m in cash leading to net debt of about CN¥441.3m.
A Look At Suzhou Keda TechnologyLtd's Liabilities
The latest balance sheet data shows that Suzhou Keda TechnologyLtd had liabilities of CN¥1.21b due within a year, and liabilities of CN¥676.5m falling due after that. On the other hand, it had cash of CN¥660.3m and CN¥1.07b worth of receivables due within a year. So its liabilities total CN¥160.2m more than the combination of its cash and short-term receivables.
Since publicly traded Suzhou Keda TechnologyLtd shares are worth a total of CN¥3.98b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Suzhou Keda TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Suzhou Keda TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 30%, to CN¥1.5b. To be frank that doesn't bode well.
Caveat Emptor
While Suzhou Keda TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥454m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥475m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Suzhou Keda TechnologyLtd has 2 warning signs we think 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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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.
