Does Greatoo Intelligent Equipment (SZSE:002031) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Greatoo Intelligent Equipment Inc. (SZSE:002031) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Greatoo Intelligent Equipment

What Is Greatoo Intelligent Equipment's Net Debt?

The image below, which you can click on for greater detail, shows that Greatoo Intelligent Equipment had debt of CN¥1.15b at the end of September 2023, a reduction from CN¥1.35b over a year. However, it also had CN¥139.0m in cash, and so its net debt is CN¥1.01b.

How Healthy Is Greatoo Intelligent Equipment's Balance Sheet?

The latest balance sheet data shows that Greatoo Intelligent Equipment had liabilities of CN¥1.10b due within a year, and liabilities of CN¥521.2m falling due after that. Offsetting these obligations, it had cash of CN¥139.0m as well as receivables valued at CN¥361.9m due within 12 months. So its liabilities total CN¥1.12b more than the combination of its cash and short-term receivables.

Of course, Greatoo Intelligent Equipment has a market capitalization of CN¥8.62b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Greatoo Intelligent Equipment 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 Greatoo Intelligent Equipment had a loss before interest and tax, and actually shrunk its revenue by 41%, to CN¥781m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Greatoo Intelligent Equipment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥25m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥333m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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 Greatoo Intelligent Equipment has 3 warning signs (and 2 which are significant) we think you should know about.

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.

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

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.