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.' 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 West Deane New Power Electric Co.,Ltd. (SHSE:603312) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Suzhou West Deane New Power ElectricLtd's Debt?

As you can see below, Suzhou West Deane New Power ElectricLtd had CN¥52.5m of debt at September 2024, down from CN¥161.3m a year prior. But on the other hand it also has CN¥889.8m in cash, leading to a CN¥837.3m net cash position.

How Healthy Is Suzhou West Deane New Power ElectricLtd's Balance Sheet?

We can see from the most recent balance sheet that Suzhou West Deane New Power ElectricLtd had liabilities of CN¥861.6m falling due within a year, and liabilities of CN¥4.02m due beyond that. Offsetting these obligations, it had cash of CN¥889.8m as well as receivables valued at CN¥1.10b due within 12 months. So it actually has CN¥1.13b more liquid assets than total liabilities.

It's good to see that Suzhou West Deane New Power ElectricLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Suzhou West Deane New Power ElectricLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Suzhou West Deane New Power ElectricLtd has increased its EBIT by 3.2% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Suzhou West Deane New Power ElectricLtd's ability to maintain a healthy balance sheet going forward. 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 Suzhou West Deane New Power ElectricLtd 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 two years, Suzhou West Deane New Power ElectricLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Suzhou West Deane New Power ElectricLtd has net cash of CN¥837.3m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 3.2% in the last twelve months. So we are not troubled with Suzhou West Deane New Power ElectricLtd's debt use. 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 2 warning signs for Suzhou West Deane New Power ElectricLtd that 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.