These 4 Measures Indicate That Guobo Electronics (SHSE:688375) Is Using Debt Reasonably Well

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. Importantly, Guobo Electronics Co., Ltd. (SHSE:688375) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Guobo Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guobo Electronics had CN¥116.6m of debt, an increase on none, over one year. But on the other hand it also has CN¥2.61b in cash, leading to a CN¥2.49b net cash position.

How Strong Is Guobo Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guobo Electronics had liabilities of CN¥1.92b due within 12 months and liabilities of CN¥116.2m due beyond that. On the other hand, it had cash of CN¥2.61b and CN¥3.05b worth of receivables due within a year. So it can boast CN¥3.62b more liquid assets than total liabilities.

This short term liquidity is a sign that Guobo Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guobo Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Guobo Electronics

On the other hand, Guobo Electronics's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Guobo Electronics 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Guobo Electronics 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, Guobo Electronics reported free cash flow worth 9.5% 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 we empathize with investors who find debt concerning, you should keep in mind that Guobo Electronics has net cash of CN¥2.49b, as well as more liquid assets than liabilities. So we don't have any problem with Guobo Electronics's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Guobo Electronics, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.