We Think Guoguang ElectricLtd.Chengdu (SHSE:688776) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Guoguang Electric Co.,Ltd.Chengdu (SHSE:688776) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Guoguang ElectricLtd.Chengdu

How Much Debt Does Guoguang ElectricLtd.Chengdu Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Guoguang ElectricLtd.Chengdu had debt of CN¥107.5m, up from CN¥30.0m in one year. But on the other hand it also has CN¥893.0m in cash, leading to a CN¥785.6m net cash position.

A Look At Guoguang ElectricLtd.Chengdu's Liabilities

The latest balance sheet data shows that Guoguang ElectricLtd.Chengdu had liabilities of CN¥376.3m due within a year, and liabilities of CN¥110.2m falling due after that. On the other hand, it had cash of CN¥893.0m and CN¥886.9m worth of receivables due within a year. So it can boast CN¥1.29b more liquid assets than total liabilities.

It's good to see that Guoguang ElectricLtd.Chengdu has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Guoguang ElectricLtd.Chengdu has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Guoguang ElectricLtd.Chengdu's load is not too heavy, because its EBIT was down 43% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Guoguang ElectricLtd.Chengdu 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Guoguang ElectricLtd.Chengdu 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 three years, Guoguang ElectricLtd.Chengdu recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guoguang ElectricLtd.Chengdu has net cash of CN¥785.6m, as well as more liquid assets than liabilities. So we are not troubled with Guoguang ElectricLtd.Chengdu's debt use. 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 instance, we've identified 2 warning signs for Guoguang ElectricLtd.Chengdu that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.