Is Guangxi Oriental Intelligent Manufacturing Technology (SZSE:002175) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Guangxi Oriental Intelligent Manufacturing Technology Co., Ltd. (SZSE:002175) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Guangxi Oriental Intelligent Manufacturing Technology

How Much Debt Does Guangxi Oriental Intelligent Manufacturing Technology Carry?

As you can see below, at the end of September 2024, Guangxi Oriental Intelligent Manufacturing Technology had CN¥37.2m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥176.8m in cash, so it actually has CN¥139.6m net cash.

A Look At Guangxi Oriental Intelligent Manufacturing Technology's Liabilities

We can see from the most recent balance sheet that Guangxi Oriental Intelligent Manufacturing Technology had liabilities of CN¥147.1m falling due within a year, and liabilities of CN¥48.8m due beyond that. On the other hand, it had cash of CN¥176.8m and CN¥71.0m worth of receivables due within a year. So it can boast CN¥52.0m more liquid assets than total liabilities.

Having regard to Guangxi Oriental Intelligent Manufacturing Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.64b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Guangxi Oriental Intelligent Manufacturing Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Guangxi Oriental Intelligent Manufacturing Technology grew its EBIT by 11,698% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangxi Oriental Intelligent Manufacturing Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Guangxi Oriental Intelligent Manufacturing Technology 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. In the last three years, Guangxi Oriental Intelligent Manufacturing Technology created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangxi Oriental Intelligent Manufacturing Technology has CN¥139.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 11,698% year-on-year EBIT growth. So is Guangxi Oriental Intelligent Manufacturing Technology's debt a risk? It doesn't seem so to us. 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. For example Guangxi Oriental Intelligent Manufacturing Technology has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.