Does Guangzhou Great Power Energy and Technology (SZSE:300438) 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 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 Guangzhou Great Power Energy and Technology Co., Ltd (SZSE:300438) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangzhou Great Power Energy and Technology

How Much Debt Does Guangzhou Great Power Energy and Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Guangzhou Great Power Energy and Technology had debt of CN¥2.62b, up from CN¥1.13b in one year. However, it does have CN¥2.75b in cash offsetting this, leading to net cash of CN¥127.9m.

How Strong Is Guangzhou Great Power Energy and Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangzhou Great Power Energy and Technology had liabilities of CN¥7.35b due within 12 months and liabilities of CN¥2.81b due beyond that. On the other hand, it had cash of CN¥2.75b and CN¥2.86b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.55b.

Guangzhou Great Power Energy and Technology has a market capitalization of CN¥11.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Guangzhou Great Power Energy and Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Guangzhou Great Power Energy and Technology's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guangzhou Great Power Energy and Technology 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangzhou Great Power Energy and Technology 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. During the last three years, Guangzhou Great Power Energy and Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Guangzhou Great Power Energy and Technology does have more liabilities than liquid assets, it also has net cash of CN¥127.9m. So although we see some areas for improvement, we're not too worried about Guangzhou Great Power Energy and Technology's balance sheet. 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 3 warning signs for Guangzhou Great Power Energy and Technology you should be aware of, and 1 of them shouldn't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.