Guangdong Mingyang ElectricLtd (SZSE:301291) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Guangdong Mingyang Electric Co.,Ltd. (SZSE:301291) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangdong Mingyang ElectricLtd

What Is Guangdong Mingyang ElectricLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Guangdong Mingyang ElectricLtd had CN¥70.8m of debt in June 2024, down from CN¥424.0m, one year before. But it also has CN¥2.48b in cash to offset that, meaning it has CN¥2.41b net cash.

How Strong Is Guangdong Mingyang ElectricLtd's Balance Sheet?

We can see from the most recent balance sheet that Guangdong Mingyang ElectricLtd had liabilities of CN¥3.35b falling due within a year, and liabilities of CN¥63.0m due beyond that. On the other hand, it had cash of CN¥2.48b and CN¥3.01b worth of receivables due within a year. So it actually has CN¥2.08b more liquid assets than total liabilities.

This excess liquidity suggests that Guangdong Mingyang ElectricLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Guangdong Mingyang ElectricLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Guangdong Mingyang ElectricLtd has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangdong Mingyang ElectricLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Guangdong Mingyang ElectricLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Guangdong Mingyang ElectricLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Mingyang ElectricLtd has net cash of CN¥2.41b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 65% over the last year. So is Guangdong Mingyang ElectricLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Guangdong Mingyang ElectricLtd you should know about.

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.

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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.