Does Guangdong Mingyang ElectricLtd (SZSE:301291) 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.' 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 note that Guangdong Mingyang Electric Co.,Ltd. (SZSE:301291) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Guangdong Mingyang ElectricLtd

What Is Guangdong Mingyang ElectricLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Guangdong Mingyang ElectricLtd had debt of CN¥160.3m at the end of March 2024, a reduction from CN¥432.7m over a year. However, it does have CN¥2.88b in cash offsetting this, leading to net cash of CN¥2.72b.

How Healthy Is Guangdong Mingyang ElectricLtd's Balance Sheet?

According to the last reported balance sheet, Guangdong Mingyang ElectricLtd had liabilities of CN¥3.46b due within 12 months, and liabilities of CN¥66.3m due beyond 12 months. Offsetting this, it had CN¥2.88b in cash and CN¥2.75b in receivables that were due within 12 months. So it can boast CN¥2.11b more liquid assets than total liabilities.

This excess liquidity suggests that Guangdong Mingyang ElectricLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Guangdong Mingyang ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Guangdong Mingyang ElectricLtd grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. 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 Mingyang ElectricLtd 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. While Guangdong Mingyang ElectricLtd 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. In the last three years, Guangdong Mingyang ElectricLtd's free cash flow amounted to 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Mingyang ElectricLtd has CN¥2.72b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 76% over the last year. So we don't think Guangdong Mingyang ElectricLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Guangdong Mingyang ElectricLtd that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com