Is Guangdong Xinbao Electrical Appliances Holdings (SZSE:002705) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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.

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See 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¥879.4m of debt at June 2024, down from CN¥1.03b a year prior. But on the other hand it also has CN¥3.30b in cash, leading to a CN¥2.42b net cash position.

How Healthy Is Guangdong Xinbao Electrical Appliances Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Xinbao Electrical Appliances Holdings had liabilities of CN¥6.64b due within 12 months and liabilities of CN¥409.0m due beyond that. Offsetting this, it had CN¥3.30b in cash and CN¥2.79b in receivables that were due within 12 months. So it has liabilities totalling CN¥956.1m more than its cash and near-term receivables, combined.

Given Guangdong Xinbao Electrical Appliances Holdings has a market capitalization of CN¥12.1b, it's hard to believe these liabilities pose much 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.

On top of that, Guangdong Xinbao Electrical Appliances Holdings grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

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¥2.42b. And it impressed us with its EBIT growth of 30% over the last year. So we don't think Guangdong Xinbao Electrical Appliances Holdings'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 Xinbao Electrical Appliances Holdings that you should be aware of.

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.