Is Guangdong Champion Asia ElectronicsLtd (SHSE:603386) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Guangdong Champion Asia Electronics Co.,Ltd. (SHSE:603386) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangdong Champion Asia ElectronicsLtd

What Is Guangdong Champion Asia ElectronicsLtd's Debt?

As you can see below, Guangdong Champion Asia ElectronicsLtd had CN¥911.2m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥58.5m in cash, and so its net debt is CN¥852.6m.

How Healthy Is Guangdong Champion Asia ElectronicsLtd's Balance Sheet?

We can see from the most recent balance sheet that Guangdong Champion Asia ElectronicsLtd had liabilities of CN¥1.70b falling due within a year, and liabilities of CN¥295.3m due beyond that. Offsetting this, it had CN¥58.5m in cash and CN¥739.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.20b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Guangdong Champion Asia ElectronicsLtd has a market capitalization of CN¥4.29b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong Champion Asia ElectronicsLtd'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.

In the last year Guangdong Champion Asia ElectronicsLtd had a loss before interest and tax, and actually shrunk its revenue by 7.4%, to CN¥2.3b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Guangdong Champion Asia ElectronicsLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥40m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥29m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Guangdong Champion Asia ElectronicsLtd (2 are potentially serious!) that you should be aware of before investing here.

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.

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.