GRG Banking Equipment (SZSE:002152) Has A Pretty 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, GRG Banking Equipment Co., Ltd. (SZSE:002152) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GRG Banking Equipment

What Is GRG Banking Equipment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 GRG Banking Equipment had CN¥3.22b of debt, an increase on CN¥490.5m, over one year. But it also has CN¥11.1b in cash to offset that, meaning it has CN¥7.91b net cash.

How Healthy Is GRG Banking Equipment's Balance Sheet?

We can see from the most recent balance sheet that GRG Banking Equipment had liabilities of CN¥11.3b falling due within a year, and liabilities of CN¥1.30b due beyond that. Offsetting these obligations, it had cash of CN¥11.1b as well as receivables valued at CN¥3.78b due within 12 months. So it can boast CN¥2.30b more liquid assets than total liabilities.

This short term liquidity is a sign that GRG Banking Equipment could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, GRG Banking Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, GRG Banking Equipment's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 GRG Banking Equipment'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While GRG Banking Equipment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, GRG Banking Equipment actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that GRG Banking Equipment has net cash of CN¥7.91b, as well as more liquid assets than liabilities. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in CN¥1.1b. So we don't think GRG Banking Equipment's use of debt is 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for GRG Banking Equipment you should know about.

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.