These 4 Measures Indicate That Guangbo Group Stock (SZSE:002103) Is Using Debt Safely

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 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. We note that Guangbo Group Stock Co., Ltd. (SZSE:002103) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Guangbo Group Stock

What Is Guangbo Group Stock's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangbo Group Stock had CN¥340.0m of debt, an increase on CN¥310.0m, over one year. But it also has CN¥553.2m in cash to offset that, meaning it has CN¥213.2m net cash.

How Strong Is Guangbo Group Stock's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangbo Group Stock had liabilities of CN¥906.6m due within 12 months and liabilities of CN¥29.9m due beyond that. Offsetting these obligations, it had cash of CN¥553.2m as well as receivables valued at CN¥470.5m due within 12 months. So it can boast CN¥87.1m more liquid assets than total liabilities.

Having regard to Guangbo Group Stock's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.98b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Guangbo Group Stock 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 Guangbo Group Stock has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangbo Group Stock will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Guangbo Group Stock 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. Happily for any shareholders, Guangbo Group Stock actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangbo Group Stock has CN¥213.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥330m, being 386% of its EBIT. So is Guangbo Group Stock'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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Guangbo Group Stock that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.