Is GRG Banking Equipment (SZSE:002152) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that GRG Banking Equipment Co., Ltd. (SZSE:002152) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GRG Banking Equipment

What Is GRG Banking Equipment's Net Debt?

As you can see below, at the end of March 2024, GRG Banking Equipment had CN¥1.20b of debt, up from CN¥462.9m a year ago. Click the image for more detail. However, it does have CN¥10.7b in cash offsetting this, leading to net cash of CN¥9.51b.

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¥9.73b falling due within a year, and liabilities of CN¥529.2m due beyond that. Offsetting this, it had CN¥10.7b in cash and CN¥2.94b in receivables that were due within 12 months. So it actually has CN¥3.39b more liquid assets than total liabilities.

This surplus suggests that GRG Banking Equipment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GRG Banking Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that GRG Banking Equipment grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if GRG Banking Equipment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case GRG Banking Equipment has CN¥9.51b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in CN¥1.2b. So we don't think GRG Banking Equipment's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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.