Guodian Nanjing Automation (SHSE:600268) Could Easily Take On More 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Guodian Nanjing Automation Co., Ltd. (SHSE:600268) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Guodian Nanjing Automation

How Much Debt Does Guodian Nanjing Automation Carry?

As you can see below, Guodian Nanjing Automation had CN¥441.8m of debt at September 2024, down from CN¥1.08b a year prior. But on the other hand it also has CN¥1.94b in cash, leading to a CN¥1.50b net cash position.

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How Healthy Is Guodian Nanjing Automation's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guodian Nanjing Automation had liabilities of CN¥5.84b due within 12 months and liabilities of CN¥335.0m due beyond that. On the other hand, it had cash of CN¥1.94b and CN¥4.40b worth of receivables due within a year. So it actually has CN¥168.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Guodian Nanjing Automation could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Guodian Nanjing Automation boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Guodian Nanjing Automation grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Guodian Nanjing Automation will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Guodian Nanjing Automation 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. Happily for any shareholders, Guodian Nanjing Automation actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guodian Nanjing Automation has CN¥1.50b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 167% of that EBIT to free cash flow, bringing in CN¥1.6b. So is Guodian Nanjing Automation's debt a risk? It doesn't seem so to us. 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 example - Guodian Nanjing Automation has 1 warning sign we think 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.