Guangzhou Shiyuan Electronic Technology (SZSE:002841) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Guangzhou Shiyuan Electronic Technology Company Limited (SZSE:002841) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Guangzhou Shiyuan Electronic Technology

What Is Guangzhou Shiyuan Electronic Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guangzhou Shiyuan Electronic Technology had CN¥2.73b of debt, an increase on CN¥2.58b, over one year. But on the other hand it also has CN¥3.78b in cash, leading to a CN¥1.05b net cash position.

A Look At Guangzhou Shiyuan Electronic Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangzhou Shiyuan Electronic Technology had liabilities of CN¥7.90b due within 12 months and liabilities of CN¥941.8m due beyond that. On the other hand, it had cash of CN¥3.78b and CN¥518.7m worth of receivables due within a year. So its liabilities total CN¥4.55b more than the combination of its cash and short-term receivables.

Since publicly traded Guangzhou Shiyuan Electronic Technology shares are worth a total of CN¥23.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Guangzhou Shiyuan Electronic Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Guangzhou Shiyuan Electronic Technology's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Guangzhou Shiyuan Electronic Technology'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Guangzhou Shiyuan Electronic Technology 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. In the last three years, Guangzhou Shiyuan Electronic Technology's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Guangzhou Shiyuan Electronic Technology does have more liabilities than liquid assets, it also has net cash of CN¥1.05b. So we are not troubled with Guangzhou Shiyuan Electronic Technology's debt use. 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. For example, we've discovered 2 warning signs for Guangzhou Shiyuan Electronic Technology that you should be aware of before investing here.

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.

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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.