Jiangxi Guoke Defence GroupLtd (SHSE:688543) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Jiangxi Guoke Defence Group Co.,Ltd. (SHSE:688543) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangxi Guoke Defence GroupLtd

What Is Jiangxi Guoke Defence GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangxi Guoke Defence GroupLtd had CN¥80.1m of debt in June 2024, down from CN¥338.9m, one year before. However, its balance sheet shows it holds CN¥1.20b in cash, so it actually has CN¥1.12b net cash.

How Healthy Is Jiangxi Guoke Defence GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiangxi Guoke Defence GroupLtd had liabilities of CN¥591.3m falling due within a year, and liabilities of CN¥65.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.20b as well as receivables valued at CN¥443.9m due within 12 months. So it actually has CN¥982.8m more liquid assets than total liabilities.

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

Also positive, Jiangxi Guoke Defence GroupLtd grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangxi Guoke Defence GroupLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangxi Guoke Defence GroupLtd 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. Looking at the most recent three years, Jiangxi Guoke Defence GroupLtd recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangxi Guoke Defence GroupLtd has CN¥1.12b in net cash and a decent-looking balance sheet. And we liked the look of last year's 27% year-on-year EBIT growth. So we don't think Jiangxi Guoke Defence GroupLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Jiangxi Guoke Defence GroupLtd has 1 warning sign we think 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.