Guangdong Xinbao Electrical Appliances Holdings (SZSE:002705) Has A Pretty 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.' 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 Xinbao Electrical Appliances Holdings Co., Ltd (SZSE:002705) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Guangdong Xinbao Electrical Appliances Holdings

What Is Guangdong Xinbao Electrical Appliances Holdings's Net Debt?

As you can see below, Guangdong Xinbao Electrical Appliances Holdings had CN¥854.5m of debt at September 2024, down from CN¥1.03b a year prior. However, it does have CN¥3.22b in cash offsetting this, leading to net cash of CN¥2.36b.

A Look At Guangdong Xinbao Electrical Appliances Holdings' Liabilities

We can see from the most recent balance sheet that Guangdong Xinbao Electrical Appliances Holdings had liabilities of CN¥6.88b falling due within a year, and liabilities of CN¥357.1m due beyond that. Offsetting these obligations, it had cash of CN¥3.22b as well as receivables valued at CN¥3.20b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥825.9m.

Of course, Guangdong Xinbao Electrical Appliances Holdings has a market capitalization of CN¥12.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Also good is that Guangdong Xinbao Electrical Appliances Holdings grew its EBIT at 17% over the last year, further increasing its ability to manage 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangdong Xinbao Electrical Appliances Holdings 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. In the last three years, Guangdong Xinbao Electrical Appliances Holdings's free cash flow amounted to 22% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Guangdong Xinbao Electrical Appliances Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.36b. And it impressed us with its EBIT growth of 17% over the last year. So we don't have any problem with Guangdong Xinbao Electrical Appliances Holdings's use of debt. 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. 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.

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.