Does Guangdong Xinbao Electrical Appliances Holdings (SZSE:002705) Have A Healthy 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.' 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. We note that Guangdong Xinbao Electrical Appliances Holdings Co., Ltd (SZSE:002705) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Guangdong Xinbao Electrical Appliances Holdings

What Is Guangdong Xinbao Electrical Appliances Holdings's Debt?

As you can see below, Guangdong Xinbao Electrical Appliances Holdings had CN¥964.8m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥3.47b in cash, leading to a CN¥2.51b net cash position.

A Look At Guangdong Xinbao Electrical Appliances Holdings' Liabilities

According to the last reported balance sheet, Guangdong Xinbao Electrical Appliances Holdings had liabilities of CN¥5.78b due within 12 months, and liabilities of CN¥215.1m due beyond 12 months. Offsetting this, it had CN¥3.47b in cash and CN¥2.01b in receivables that were due within 12 months. So it has liabilities totalling CN¥513.6m more than its cash and near-term receivables, combined.

Since publicly traded Guangdong Xinbao Electrical Appliances Holdings shares are worth a total of CN¥10.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Guangdong Xinbao Electrical Appliances Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Guangdong Xinbao Electrical Appliances Holdings has been able to increase its EBIT by 29% 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 Guangdong Xinbao Electrical Appliances Holdings 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. Guangdong Xinbao Electrical Appliances Holdings 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. Over the last three years, Guangdong Xinbao Electrical Appliances Holdings reported free cash flow worth 3.3% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Guangdong Xinbao Electrical Appliances Holdings has CN¥2.51b in net cash. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't have any problem with Guangdong Xinbao Electrical Appliances Holdings's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Guangdong Xinbao Electrical Appliances Holdings you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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