These 4 Measures Indicate That Guangdong Insight Brand Marketing GroupLtd (SZSE:300781) Is Using Debt Safely

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 Guangdong Insight Brand Marketing Group Co.,Ltd. (SZSE:300781) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Guangdong Insight Brand Marketing GroupLtd

What Is Guangdong Insight Brand Marketing GroupLtd's Debt?

As you can see below, Guangdong Insight Brand Marketing GroupLtd had CN¥30.4m of debt at March 2024, down from CN¥34.8m a year prior. But it also has CN¥279.3m in cash to offset that, meaning it has CN¥248.9m net cash.

How Healthy Is Guangdong Insight Brand Marketing GroupLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong Insight Brand Marketing GroupLtd had liabilities of CN¥248.2m due within a year, and liabilities of CN¥14.6m falling due after that. On the other hand, it had cash of CN¥279.3m and CN¥339.3m worth of receivables due within a year. So it actually has CN¥355.8m more liquid assets than total liabilities.

This surplus suggests that Guangdong Insight Brand Marketing GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guangdong Insight Brand Marketing GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Guangdong Insight Brand Marketing GroupLtd grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong Insight Brand Marketing GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Guangdong Insight Brand Marketing GroupLtd 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. Over the last three years, Guangdong Insight Brand Marketing GroupLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Insight Brand Marketing GroupLtd has net cash of CN¥248.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in CN¥52m. So we don't think Guangdong Insight Brand Marketing GroupLtd's use of debt is risky. 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. We've identified 2 warning signs with Guangdong Insight Brand Marketing GroupLtd , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com