These 4 Measures Indicate That Guomai Technologies (SZSE:002093) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Guomai Technologies, Inc. (SZSE:002093) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, 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 Guomai Technologies

What Is Guomai Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Guomai Technologies had debt of CN¥281.3m, up from CN¥91.1m in one year. However, its balance sheet shows it holds CN¥720.8m in cash, so it actually has CN¥439.5m net cash.

How Healthy Is Guomai Technologies' Balance Sheet?

We can see from the most recent balance sheet that Guomai Technologies had liabilities of CN¥468.7m falling due within a year, and liabilities of CN¥323.7m due beyond that. Offsetting this, it had CN¥720.8m in cash and CN¥306.9m in receivables that were due within 12 months. So it can boast CN¥235.3m 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.

Another good sign is that Guomai Technologies has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guomai Technologies has net cash of CN¥439.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 21% over the last year. 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 instance, we've identified 2 warning signs for Guomai Technologies that you should be aware of.

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.

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