Is Guangdong Vanward New Electric (SZSE:002543) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Guangdong Vanward New Electric Co., Ltd. (SZSE:002543) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Guangdong Vanward New Electric

What Is Guangdong Vanward New Electric's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guangdong Vanward New Electric had CN¥1.06b of debt, an increase on CN¥269.6m, over one year. However, its balance sheet shows it holds CN¥3.66b in cash, so it actually has CN¥2.60b net cash.

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

Zooming in on the latest balance sheet data, we can see that Guangdong Vanward New Electric had liabilities of CN¥4.19b due within 12 months and liabilities of CN¥58.1m due beyond that. On the other hand, it had cash of CN¥3.66b and CN¥1.47b worth of receivables due within a year. So it can boast CN¥874.3m 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!

On top of that, Guangdong Vanward New Electric grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangdong Vanward New Electric's ability to maintain a healthy balance sheet going forward. 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. Guangdong Vanward New Electric may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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 it is always sensible to investigate a company's debt, in this case Guangdong Vanward New Electric has CN¥2.60b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in CN¥878m. So we don't think Guangdong Vanward New Electric'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. For instance, we've identified 1 warning sign for Guangdong Vanward New Electric that 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.