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.' 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. We can see that Suzhou Jinfu Technology Co., Ltd. (SZSE:300128) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Suzhou Jinfu Technology
What Is Suzhou Jinfu Technology's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Suzhou Jinfu Technology had debt of CN¥1.04b, up from CN¥810.9m in one year. However, it does have CN¥123.2m in cash offsetting this, leading to net debt of about CN¥912.9m.
A Look At Suzhou Jinfu Technology's Liabilities
We can see from the most recent balance sheet that Suzhou Jinfu Technology had liabilities of CN¥1.63b falling due within a year, and liabilities of CN¥476.3m due beyond that. Offsetting this, it had CN¥123.2m in cash and CN¥662.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.32b more than its cash and near-term receivables, combined.
Suzhou Jinfu Technology has a market capitalization of CN¥5.99b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Jinfu Technology will need earnings to service that debt. 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 Jinfu Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥1.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Suzhou Jinfu Technology still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥126m at the EBIT level. 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. However, it doesn't help that it burned through CN¥126m of cash over the last year. So to be blunt we think it is risky. 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 example - Suzhou Jinfu Technology has 3 warning signs we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.