Guangdong Vanward New Electric (SZSE:002543) Has A Rock Solid Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Guangdong Vanward New Electric Co., Ltd. (SZSE:002543) does carry 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Guangdong Vanward New Electric

What Is Guangdong Vanward New Electric's Net Debt?

The chart below, which you can click on for greater detail, shows that Guangdong Vanward New Electric had CN¥710.0m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥3.46b in cash, leading to a CN¥2.75b net cash position.

How Healthy Is Guangdong Vanward New Electric's Balance Sheet?

We can see from the most recent balance sheet that Guangdong Vanward New Electric had liabilities of CN¥3.64b falling due within a year, and liabilities of CN¥51.8m due beyond that. Offsetting this, it had CN¥3.46b in cash and CN¥869.6m in receivables that were due within 12 months. So it can boast CN¥636.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Guangdong Vanward New Electric could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Guangdong Vanward New Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Guangdong Vanward New Electric has been able to increase its EBIT by 22% in twelve months, making it easier to pay down 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 Guangdong Vanward New Electric 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangdong Vanward New Electric 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, Guangdong Vanward New Electric 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

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Vanward New Electric has net cash of CN¥2.75b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥617m, being 135% of its EBIT. So is Guangdong Vanward New Electric'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 - Guangdong Vanward New Electric has 2 warning signs we think you should be aware of.

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.