Greatoo Intelligent Equipment (SZSE:002031) Is Making Moderate Use Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Greatoo Intelligent Equipment Inc. (SZSE:002031) makes use of debt. But should shareholders be worried about its use of debt?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Greatoo Intelligent Equipment

How Much Debt Does Greatoo Intelligent Equipment Carry?

As you can see below, Greatoo Intelligent Equipment had CN¥1.26b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥123.6m in cash, and so its net debt is CN¥1.13b.

A Look At Greatoo Intelligent Equipment's Liabilities

We can see from the most recent balance sheet that Greatoo Intelligent Equipment had liabilities of CN¥1.39b falling due within a year, and liabilities of CN¥510.7m due beyond that. On the other hand, it had cash of CN¥123.6m and CN¥594.2m worth of receivables due within a year. So its liabilities total CN¥1.18b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Greatoo Intelligent Equipment has a market capitalization of CN¥5.37b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 18%, to CN¥756m. We would much prefer see growth.

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). Indeed, it lost CN¥32m at the EBIT level. 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¥864m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 3 warning signs for Greatoo Intelligent Equipment (2 can't be ignored) you should be aware of.

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.

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