China Greatwall Technology Group (SZSE:000066) Is Making Moderate Use Of 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 note that China Greatwall Technology Group Co., Ltd. (SZSE:000066) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for China Greatwall Technology Group

How Much Debt Does China Greatwall Technology Group Carry?

As you can see below, at the end of March 2024, China Greatwall Technology Group had CN¥10.9b of debt, up from CN¥9.62b a year ago. Click the image for more detail. However, it does have CN¥4.89b in cash offsetting this, leading to net debt of about CN¥5.98b.

A Look At China Greatwall Technology Group's Liabilities

The latest balance sheet data shows that China Greatwall Technology Group had liabilities of CN¥10.3b due within a year, and liabilities of CN¥10.3b falling due after that. Offsetting these obligations, it had cash of CN¥4.89b as well as receivables valued at CN¥6.39b due within 12 months. So its liabilities total CN¥9.31b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since China Greatwall Technology Group has a market capitalization of CN¥25.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 China Greatwall Technology Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, China Greatwall Technology Group reported revenue of CN¥14b, which is a gain of 3.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months China Greatwall Technology Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥839m 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. Another cause for caution is that is bled CN¥1.1b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. We've identified 1 warning sign with China Greatwall Technology Group , and understanding them should be part of your investment process.

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.