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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Guizhou Space Appliance Co., LTD (SZSE:002025) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Guizhou Space Appliance

What Is Guizhou Space Appliance's Debt?

As you can see below, at the end of March 2024, Guizhou Space Appliance had CN¥58.4m of debt, up from CN¥30.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.97b in cash, so it actually has CN¥2.91b net cash.

How Strong Is Guizhou Space Appliance's Balance Sheet?

We can see from the most recent balance sheet that Guizhou Space Appliance had liabilities of CN¥3.40b falling due within a year, and liabilities of CN¥474.6m due beyond that. On the other hand, it had cash of CN¥2.97b and CN¥5.56b worth of receivables due within a year. So it can boast CN¥4.66b more liquid assets than total liabilities.

This surplus suggests that Guizhou Space Appliance is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble 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!

And we also note warmly that Guizhou Space Appliance grew its EBIT by 19% last year, making its debt load easier to handle. 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 Guizhou Space Appliance can strengthen its balance sheet over time. 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. Guizhou Space Appliance 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. During the last three years, Guizhou Space Appliance produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guizhou Space Appliance has CN¥2.91b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 19% over the last year. So is Guizhou Space Appliance's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Guizhou Space Appliance 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.

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.