These 4 Measures Indicate That Guangdong Fenghua Advanced Technology (Holding) (SZSE:000636) Is Using Debt Safely

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 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. Importantly, Guangdong Fenghua Advanced Technology (Holding) Co., Ltd. (SZSE:000636) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangdong Fenghua Advanced Technology (Holding)

What Is Guangdong Fenghua Advanced Technology (Holding)'s Debt?

As you can see below, Guangdong Fenghua Advanced Technology (Holding) had CN¥445.8m of debt at September 2024, down from CN¥1.85b a year prior. However, it does have CN¥4.34b in cash offsetting this, leading to net cash of CN¥3.89b.

A Look At Guangdong Fenghua Advanced Technology (Holding)'s Liabilities

According to the last reported balance sheet, Guangdong Fenghua Advanced Technology (Holding) had liabilities of CN¥2.91b due within 12 months, and liabilities of CN¥739.8m due beyond 12 months. On the other hand, it had cash of CN¥4.34b and CN¥2.11b worth of receivables due within a year. So it actually has CN¥2.79b more liquid assets than total liabilities.

This surplus suggests that Guangdong Fenghua Advanced Technology (Holding) is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Guangdong Fenghua Advanced Technology (Holding) boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Guangdong Fenghua Advanced Technology (Holding) turned things around in the last 12 months, delivering and EBIT of CN¥229m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangdong Fenghua Advanced Technology (Holding)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Guangdong Fenghua Advanced Technology (Holding) 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. Happily for any shareholders, Guangdong Fenghua Advanced Technology (Holding) actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Fenghua Advanced Technology (Holding) has net cash of CN¥3.89b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥247m, being 108% of its EBIT. So is Guangdong Fenghua Advanced Technology (Holding)'s debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Guangdong Fenghua Advanced Technology (Holding)'s earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.