Is Guomai Technologies (SZSE:002093) A Risky Investment?

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.' 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. We can see that Guomai Technologies, Inc. (SZSE:002093) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 at September 2024 Guomai Technologies had debt of CN¥199.2m, up from CN¥86.1m in one year. However, its balance sheet shows it holds CN¥852.0m in cash, so it actually has CN¥652.9m net cash.

How Healthy Is Guomai Technologies' Balance Sheet?

The latest balance sheet data shows that Guomai Technologies had liabilities of CN¥668.0m due within a year, and liabilities of CN¥261.9m falling due after that. On the other hand, it had cash of CN¥852.0m and CN¥315.3m worth of receivables due within a year. So it can boast CN¥237.4m more liquid assets than total liabilities.

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

But the other side of the story is that Guomai Technologies saw its EBIT decline by 2.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guomai Technologies'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. Guomai Technologies 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, Guomai Technologies recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guomai Technologies has net cash of CN¥652.9m, as well as more liquid assets than liabilities. So we are not troubled with Guomai Technologies's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Guomai Technologies has 1 warning sign we think 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.