We Think Guobo Electronics (SHSE:688375) Can Stay On Top Of Its 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.' 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 Guobo Electronics Co., Ltd. (SHSE:688375) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Guobo Electronics

How Much Debt Does Guobo Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guobo Electronics had CN¥35.4m of debt, an increase on none, over one year. However, it does have CN¥2.36b in cash offsetting this, leading to net cash of CN¥2.33b.

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¥1.94b due within 12 months and liabilities of CN¥128.9m due beyond that. Offsetting this, it had CN¥2.36b in cash and CN¥3.33b in receivables that were due within 12 months. So it actually has 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. Succinctly put, Guobo Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Guobo Electronics grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Guobo Electronics'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Guobo Electronics 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, Guobo Electronics reported free cash flow worth 13% 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¥2.33b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 21% over the last year. So is Guobo Electronics's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Guobo Electronics that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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

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.