Guangdong Mingyang ElectricLtd (SZSE:301291) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Guangdong Mingyang ElectricLtd

What Is Guangdong Mingyang ElectricLtd's Debt?

The image below, which you can click on for greater detail, shows that Guangdong Mingyang ElectricLtd had debt of CN¥47.6m at the end of September 2024, a reduction from CN¥426.9m over a year. However, it does have CN¥2.00b in cash offsetting this, leading to net cash of CN¥1.95b.

A Look At Guangdong Mingyang ElectricLtd's Liabilities

According to the last reported balance sheet, Guangdong Mingyang ElectricLtd had liabilities of CN¥4.04b due within 12 months, and liabilities of CN¥32.8m due beyond 12 months. On the other hand, it had cash of CN¥2.00b and CN¥3.34b worth of receivables due within a year. So it can boast CN¥1.26b more liquid assets than total liabilities.

This surplus suggests that Guangdong Mingyang ElectricLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guangdong Mingyang ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Guangdong Mingyang ElectricLtd has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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'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. 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. Over the last three years, Guangdong Mingyang ElectricLtd reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Mingyang ElectricLtd has CN¥1.95b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 43% over the last year. So we don't think Guangdong Mingyang ElectricLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Guangdong Mingyang ElectricLtd you should be aware of, and 1 of them is a bit concerning.

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.