Gree Electric Appliances of Zhuhai (SZSE:000651) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Gree Electric Appliances, Inc. of Zhuhai (SZSE:000651) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Gree Electric Appliances of Zhuhai

How Much Debt Does Gree Electric Appliances of Zhuhai Carry?

The chart below, which you can click on for greater detail, shows that Gree Electric Appliances of Zhuhai had CN¥87.6b in debt in September 2024; about the same as the year before. But it also has CN¥125.9b in cash to offset that, meaning it has CN¥38.3b net cash.

A Look At Gree Electric Appliances of Zhuhai's Liabilities

Zooming in on the latest balance sheet data, we can see that Gree Electric Appliances of Zhuhai had liabilities of CN¥211.7b due within 12 months and liabilities of CN¥29.5b due beyond that. On the other hand, it had cash of CN¥125.9b and CN¥38.0b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥77.2b.

This deficit isn't so bad because Gree Electric Appliances of Zhuhai is worth a massive CN¥232.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Gree Electric Appliances of Zhuhai also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Gree Electric Appliances of Zhuhai has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Gree Electric Appliances of Zhuhai'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Gree Electric Appliances of Zhuhai generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Gree Electric Appliances of Zhuhai does have more liabilities than liquid assets, it also has net cash of CN¥38.3b. And it impressed us with free cash flow of CN¥26b, being 97% of its EBIT. So we don't think Gree Electric Appliances of Zhuhai'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. Be aware that Gree Electric Appliances of Zhuhai is showing 1 warning sign in our investment analysis , you should know about...

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.