Does Guangzhou Risong Intelligent Technology Holding (SHSE:688090) 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.' 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 Guangzhou Risong Intelligent Technology Holding Co., Ltd. (SHSE:688090) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Guangzhou Risong Intelligent Technology Holding

What Is Guangzhou Risong Intelligent Technology Holding's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Guangzhou Risong Intelligent Technology Holding had debt of CN¥142.0m, up from CN¥131.3m in one year. However, its balance sheet shows it holds CN¥385.2m in cash, so it actually has CN¥243.2m net cash.

A Look At Guangzhou Risong Intelligent Technology Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangzhou Risong Intelligent Technology Holding had liabilities of CN¥629.4m due within 12 months and liabilities of CN¥61.5m due beyond that. Offsetting these obligations, it had cash of CN¥385.2m as well as receivables valued at CN¥534.1m due within 12 months. So it can boast CN¥228.4m more liquid assets than total liabilities.

This surplus suggests that Guangzhou Risong Intelligent Technology Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangzhou Risong Intelligent Technology Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Guangzhou Risong Intelligent Technology Holding made a loss at the EBIT level, last year, it was also good to see that it generated CN¥28m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guangzhou Risong Intelligent Technology Holding 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. Guangzhou Risong Intelligent Technology Holding 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. Over the last year, Guangzhou Risong Intelligent Technology Holding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangzhou Risong Intelligent Technology Holding has net cash of CN¥243.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 395% of that EBIT to free cash flow, bringing in CN¥110m. So is Guangzhou Risong Intelligent Technology Holding'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 Guangzhou Risong Intelligent Technology Holding has 3 warning signs (and 2 which are a bit unpleasant) 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.

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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.