Does Guizhou Space Appliance (SZSE:002025) Have A Healthy Balance Sheet?

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 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 can see that Guizhou Space Appliance Co., LTD (SZSE:002025) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Guizhou Space Appliance

How Much Debt Does Guizhou Space Appliance Carry?

As you can see below, Guizhou Space Appliance had CN¥64.1m of debt at September 2024, down from CN¥360.0m a year prior. However, its balance sheet shows it holds CN¥2.57b in cash, so it actually has CN¥2.51b net cash.

How Strong Is Guizhou Space Appliance's Balance Sheet?

The latest balance sheet data shows that Guizhou Space Appliance had liabilities of CN¥3.64b due within a year, and liabilities of CN¥548.6m falling due after that. Offsetting these obligations, it had cash of CN¥2.57b as well as receivables valued at CN¥5.33b due within 12 months. So it can boast CN¥3.72b more liquid assets than total liabilities.

It's good to see that Guizhou Space Appliance has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Guizhou Space Appliance boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Guizhou Space Appliance's saving grace is its low debt levels, because its EBIT has tanked 28% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Guizhou Space Appliance'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 company can only pay off debt with cold hard cash, not accounting profits. While Guizhou Space Appliance 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. Over the most recent three years, Guizhou Space Appliance recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guizhou Space Appliance has CN¥2.51b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in CN¥785m. So we don't have any problem with Guizhou Space Appliance's use of debt. 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. For example - Guizhou Space Appliance has 2 warning signs 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.