David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies GuangDong Suqun New Material Co.,Ltd. (SZSE:301489) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

What Is GuangDong Suqun New MaterialLtd's Debt?

The image below, which you can click on for greater detail, shows that GuangDong Suqun New MaterialLtd had debt of CN¥10.8m at the end of March 2024, a reduction from CN¥130.7m over a year. However, it does have CN¥459.7m in cash offsetting this, leading to net cash of CN¥448.9m.

How Strong Is GuangDong Suqun New MaterialLtd's Balance Sheet?

We can see from the most recent balance sheet that GuangDong Suqun New MaterialLtd had liabilities of CN¥195.2m falling due within a year, and liabilities of CN¥20.0m due beyond that. Offsetting these obligations, it had cash of CN¥459.7m as well as receivables valued at CN¥195.0m due within 12 months. So it can boast CN¥439.5m more liquid assets than total liabilities.

This surplus suggests that GuangDong Suqun New MaterialLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that GuangDong Suqun New MaterialLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that GuangDong Suqun New MaterialLtd has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 GuangDong Suqun New MaterialLtd 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. While GuangDong Suqun New MaterialLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, GuangDong Suqun New MaterialLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case GuangDong Suqun New MaterialLtd has CN¥448.9m in net cash and a decent-looking balance sheet. So we are not troubled with GuangDong Suqun New MaterialLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with GuangDong Suqun New MaterialLtd (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.