Would Guangzhou Great Power Energy and Technology (SZSE:300438) Be Better Off With Less Debt?

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. 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?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 2024 Guangzhou Great Power Energy and Technology had debt of CN¥2.91b, up from CN¥2.62b in one year. However, it also had CN¥1.38b in cash, and so its net debt is CN¥1.53b.

A Look At Guangzhou Great Power Energy and Technology's Liabilities

The latest balance sheet data shows that Guangzhou Great Power Energy and Technology had liabilities of CN¥8.02b due within a year, and liabilities of CN¥2.76b falling due after that. On the other hand, it had cash of CN¥1.38b and CN¥3.67b worth of receivables due within a year. So its liabilities total CN¥5.73b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Guangzhou Great Power Energy and Technology has a market capitalization of CN¥15.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Guangzhou Great Power Energy and Technology'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.

In the last year Guangzhou Great Power Energy and Technology had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥6.8b. We would much prefer see growth.

Caveat Emptor

Not only did Guangzhou Great Power Energy and Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥103m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥1.1b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Guangzhou Great Power Energy and Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.