Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Suzhou Recodeal Interconnect System Co.,Ltd (SHSE:688800) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Suzhou Recodeal Interconnect SystemLtd's Net Debt?

As you can see below, at the end of March 2024, Suzhou Recodeal Interconnect SystemLtd had CN¥570.1m of debt, up from CN¥120.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.00b in cash, leading to a CN¥433.5m net cash position.

A Look At Suzhou Recodeal Interconnect SystemLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Suzhou Recodeal Interconnect SystemLtd had liabilities of CN¥1.35b due within 12 months and liabilities of CN¥355.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.00b as well as receivables valued at CN¥1.07b due within 12 months. So it actually has CN¥366.6m more liquid assets than total liabilities.

This surplus suggests that Suzhou Recodeal Interconnect SystemLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Suzhou Recodeal Interconnect SystemLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Suzhou Recodeal Interconnect SystemLtd if management cannot prevent a repeat of the 48% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Suzhou Recodeal Interconnect SystemLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Suzhou Recodeal Interconnect SystemLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Suzhou Recodeal Interconnect SystemLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Suzhou Recodeal Interconnect SystemLtd has net cash of CN¥433.5m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Suzhou Recodeal Interconnect SystemLtd's balance sheet. 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. We've identified 2 warning signs with Suzhou Recodeal Interconnect SystemLtd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com