Here's Why Guomai Technologies (SZSE:002093) Can Manage Its Debt Responsibly

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, Guomai Technologies, Inc. (SZSE:002093) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Guomai Technologies

What Is Guomai Technologies's Debt?

The image below, which you can click on for greater detail, shows that Guomai Technologies had debt of CN¥86.1m at the end of September 2023, a reduction from CN¥96.1m over a year. But it also has CN¥851.7m in cash to offset that, meaning it has CN¥765.6m net cash.

How Strong Is Guomai Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guomai Technologies had liabilities of CN¥658.4m due within 12 months and liabilities of CN¥131.3m due beyond that. Offsetting this, it had CN¥851.7m in cash and CN¥206.4m in receivables that were due within 12 months. So it can boast CN¥268.4m more liquid assets than total liabilities.

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

On top of that, Guomai Technologies grew its EBIT by 59% 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 you can't view debt in total isolation; since Guomai Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guomai Technologies 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, Guomai Technologies reported free cash flow worth 7.7% 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 it is always sensible to investigate a company's debt, in this case Guomai Technologies has CN¥765.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 59% year-on-year EBIT growth. So is Guomai Technologies's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Guomai Technologies that you should be aware of.

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.