Does China Greatwall Technology Group (SZSE:000066) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, China Greatwall Technology Group Co., Ltd. (SZSE:000066) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

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 September 2024, China Greatwall Technology Group had CN¥10.9b of debt, up from CN¥10.3b a year ago. Click the image for more detail. However, it also had CN¥5.24b in cash, and so its net debt is CN¥5.61b.

A Look At China Greatwall Technology Group's Liabilities

According to the last reported balance sheet, China Greatwall Technology Group had liabilities of CN¥12.0b due within 12 months, and liabilities of CN¥8.77b due beyond 12 months. Offsetting this, it had CN¥5.24b in cash and CN¥6.35b in receivables that were due within 12 months. So it has liabilities totalling CN¥9.14b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since China Greatwall Technology Group has a market capitalization of CN¥41.9b, 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. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year China Greatwall Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to CN¥15b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months China Greatwall Technology Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥736m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥165m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with China Greatwall Technology Group (including 1 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.