We Think Gree Electric Appliances of Zhuhai (SZSE:000651) Can Stay On Top Of Its Debt

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 Gree Electric Appliances, Inc. of Zhuhai (SZSE:000651) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Gree Electric Appliances of Zhuhai

How Much Debt Does Gree Electric Appliances of Zhuhai Carry?

As you can see below, Gree Electric Appliances of Zhuhai had CN¥92.8b of debt at March 2024, down from CN¥103.0b a year prior. But on the other hand it also has CN¥132.9b in cash, leading to a CN¥40.1b net cash position.

A Look At Gree Electric Appliances of Zhuhai's Liabilities

The latest balance sheet data shows that Gree Electric Appliances of Zhuhai had liabilities of CN¥209.0b due within a year, and liabilities of CN¥46.4b falling due after that. Offsetting these obligations, it had cash of CN¥132.9b as well as receivables valued at CN¥35.7b due within 12 months. So it has liabilities totalling CN¥86.8b more than its cash and near-term receivables, combined.

Gree Electric Appliances of Zhuhai has a very large market capitalization of CN¥229.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Also good is that Gree Electric Appliances of Zhuhai grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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. Over the last three years, Gree Electric Appliances of Zhuhai recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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¥40.1b. And it impressed us with free cash flow of CN¥33b, being 96% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Gree Electric Appliances of Zhuhai 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.