Guangzhou Risong Intelligent Technology Holding (SHSE:688090) 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.' 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. We can see that Guangzhou Risong Intelligent Technology Holding Co., Ltd. (SHSE:688090) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

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

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangzhou Risong Intelligent Technology Holding had CN¥148.4m of debt, an increase on CN¥134.1m, over one year. But it also has CN¥385.2m in cash to offset that, meaning it has CN¥236.8m net cash.

A Look At Guangzhou Risong Intelligent Technology Holding's Liabilities

We can see from the most recent balance sheet that Guangzhou Risong Intelligent Technology Holding had liabilities of CN¥629.4m falling due within a year, and liabilities of CN¥61.5m due beyond that. Offsetting this, it had CN¥385.2m in cash and CN¥534.1m in receivables that were 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.

View our latest analysis for Guangzhou Risong Intelligent Technology Holding

Fortunately, Guangzhou Risong Intelligent Technology Holding grew its EBIT by 2.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Guangzhou Risong Intelligent Technology Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 two years, Guangzhou Risong Intelligent Technology Holding actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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¥236.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 580% of that EBIT to free cash flow, bringing in CN¥110m. So we don't think Guangzhou Risong Intelligent Technology Holding's use of debt is 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. To that end, you should learn about the 3 warning signs we've spotted with Guangzhou Risong Intelligent Technology Holding (including 1 which is a bit unpleasant) .

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.