Is Greenworks (Jiangsu) (SZSE:301260) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Greenworks (Jiangsu) Co., Ltd. (SZSE:301260) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Greenworks (Jiangsu)

How Much Debt Does Greenworks (Jiangsu) Carry?

You can click the graphic below for the historical numbers, but it shows that Greenworks (Jiangsu) had CN¥2.05b of debt in June 2024, down from CN¥2.58b, one year before. However, it does have CN¥3.16b in cash offsetting this, leading to net cash of CN¥1.11b.

How Strong Is Greenworks (Jiangsu)'s Balance Sheet?

According to the last reported balance sheet, Greenworks (Jiangsu) had liabilities of CN¥3.02b due within 12 months, and liabilities of CN¥1.44b due beyond 12 months. Offsetting this, it had CN¥3.16b in cash and CN¥1.76b in receivables that were due within 12 months. So it can boast CN¥462.6m more liquid assets than total liabilities.

This surplus suggests that Greenworks (Jiangsu) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Greenworks (Jiangsu) has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Greenworks (Jiangsu)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Greenworks (Jiangsu) reported revenue of CN¥5.0b, which is a gain of 9.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Greenworks (Jiangsu)?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Greenworks (Jiangsu) had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥208m and booked a CN¥299m accounting loss. But the saving grace is the CN¥1.11b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Greenworks (Jiangsu) I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.