Here's Why Guangdong Kingstrong Technology (SZSE:300629) Can Manage Its Debt Responsibly

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.' 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. We note that Guangdong Kingstrong Technology Co., Ltd. (SZSE:300629) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangdong Kingstrong Technology

What Is Guangdong Kingstrong Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangdong Kingstrong Technology had CN¥55.9m of debt, an increase on CN¥7.23m, over one year. But it also has CN¥263.9m in cash to offset that, meaning it has CN¥208.0m net cash.

How Strong Is Guangdong Kingstrong Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Kingstrong Technology had liabilities of CN¥182.8m due within 12 months and liabilities of CN¥144.1m due beyond that. On the other hand, it had cash of CN¥263.9m and CN¥965.7m worth of receivables due within a year. So it can boast CN¥902.7m more liquid assets than total liabilities.

It's good to see that Guangdong Kingstrong Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Guangdong Kingstrong Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Guangdong Kingstrong Technology grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong Kingstrong Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Guangdong Kingstrong 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, Guangdong Kingstrong Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Kingstrong Technology has net cash of CN¥208.0m, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we are not troubled with Guangdong Kingstrong Technology's debt use. 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. We've identified 1 warning sign with Guangdong Kingstrong Technology , and understanding them should be part of your investment process.

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.