Gree Electric Appliances of Zhuhai (SZSE:000651) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Gree Electric Appliances, Inc. of Zhuhai (SZSE:000651) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Gree Electric Appliances of Zhuhai

What Is Gree Electric Appliances of Zhuhai's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Gree Electric Appliances of Zhuhai had CN¥88.4b of debt in June 2024, down from CN¥102.5b, one year before. However, it does have CN¥158.2b in cash offsetting this, leading to net cash of CN¥69.8b.

A Look At Gree Electric Appliances of Zhuhai's Liabilities

According to the last reported balance sheet, Gree Electric Appliances of Zhuhai had liabilities of CN¥228.2b due within 12 months, and liabilities of CN¥35.0b due beyond 12 months. Offsetting these obligations, it had cash of CN¥158.2b as well as receivables valued at CN¥40.3b due within 12 months. So it has liabilities totalling CN¥64.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Gree Electric Appliances of Zhuhai has a huge market capitalization of CN¥263.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Gree Electric Appliances of Zhuhai boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Gree Electric Appliances of Zhuhai has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Gree Electric Appliances of Zhuhai can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Gree Electric Appliances of Zhuhai 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, Gree Electric Appliances of Zhuhai actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Gree Electric Appliances of Zhuhai's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥69.8b. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in CN¥26b. So we don't think Gree Electric Appliances of Zhuhai'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. For instance, we've identified 1 warning sign for Gree Electric Appliances of Zhuhai that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.