We Think Jiangxi Guoke Defence GroupLtd (SHSE:688543) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Jiangxi Guoke Defence Group Co.,Ltd. (SHSE:688543) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Jiangxi Guoke Defence GroupLtd

What Is Jiangxi Guoke Defence GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Jiangxi Guoke Defence GroupLtd had debt of CN¥80.3m at the end of March 2024, a reduction from CN¥409.1m over a year. But on the other hand it also has CN¥1.46b in cash, leading to a CN¥1.38b net cash position.

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

The latest balance sheet data shows that Jiangxi Guoke Defence GroupLtd had liabilities of CN¥669.4m due within a year, and liabilities of CN¥66.0m falling due after that. On the other hand, it had cash of CN¥1.46b and CN¥344.6m worth of receivables due within a year. So it actually has CN¥1.07b more liquid assets than total liabilities.

This surplus suggests that Jiangxi Guoke Defence GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangxi Guoke Defence GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Jiangxi Guoke Defence GroupLtd grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangxi Guoke Defence GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangxi Guoke Defence GroupLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Jiangxi Guoke Defence GroupLtd's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangxi Guoke Defence GroupLtd has net cash of CN¥1.38b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 36% over the last year. So is Jiangxi Guoke Defence GroupLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Jiangxi Guoke Defence GroupLtd, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.