These 4 Measures Indicate That Guangdong Create Century Intelligent Equipment Group (SZSE:300083) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Guangdong Create Century Intelligent Equipment Group Corporation Limited (SZSE:300083) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangdong Create Century Intelligent Equipment Group

What Is Guangdong Create Century Intelligent Equipment Group's Net Debt?

The image below, which you can click on for greater detail, shows that Guangdong Create Century Intelligent Equipment Group had debt of CN¥1.47b at the end of September 2024, a reduction from CN¥1.57b over a year. However, because it has a cash reserve of CN¥903.5m, its net debt is less, at about CN¥570.4m.

A Look At Guangdong Create Century Intelligent Equipment Group's Liabilities

The latest balance sheet data shows that Guangdong Create Century Intelligent Equipment Group had liabilities of CN¥4.28b due within a year, and liabilities of CN¥1.00b falling due after that. On the other hand, it had cash of CN¥903.5m and CN¥2.48b worth of receivables due within a year. So it has liabilities totalling CN¥1.90b more than its cash and near-term receivables, combined.

Of course, Guangdong Create Century Intelligent Equipment Group has a market capitalization of CN¥11.1b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Guangdong Create Century Intelligent Equipment Group's net debt is sitting at a very reasonable 2.1 times its EBITDA, while its EBIT covered its interest expense just 6.3 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. We also note that Guangdong Create Century Intelligent Equipment Group improved its EBIT from a last year's loss to a positive CN¥177m. 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 Guangdong Create Century Intelligent Equipment Group 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. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Looking at the most recent year, Guangdong Create Century Intelligent Equipment Group recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Guangdong Create Century Intelligent Equipment Group's interest cover was a real positive on this analysis, as was its level of total liabilities. On the other hand, its net debt to EBITDA makes us a little less comfortable about its debt. Looking at all this data makes us feel a little cautious about Guangdong Create Century Intelligent Equipment Group's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Guangdong Create Century Intelligent Equipment Group .

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.