We Think Guangzhou Shiyuan Electronic Technology (SZSE:002841) Can Stay On Top Of Its 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.' 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 more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Guangzhou Shiyuan Electronic Technology

How Much Debt Does Guangzhou Shiyuan Electronic Technology Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Guangzhou Shiyuan Electronic Technology had debt of CN¥3.17b, up from CN¥2.67b in one year. However, its balance sheet shows it holds CN¥7.56b in cash, so it actually has CN¥4.39b net cash.

A Look At Guangzhou Shiyuan Electronic Technology's Liabilities

The latest balance sheet data shows that Guangzhou Shiyuan Electronic Technology had liabilities of CN¥9.51b due within a year, and liabilities of CN¥914.8m falling due after that. Offsetting these obligations, it had cash of CN¥7.56b as well as receivables valued at CN¥703.5m due within 12 months. So its liabilities total CN¥2.16b 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¥21.8b, 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. While it does have liabilities worth noting, Guangzhou Shiyuan Electronic Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Guangzhou Shiyuan Electronic Technology if management cannot prevent a repeat of the 41% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guangzhou Shiyuan Electronic Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Guangzhou Shiyuan Electronic Technology produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Guangzhou Shiyuan Electronic Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.39b. So we don't have any problem with Guangzhou Shiyuan Electronic Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Guangzhou Shiyuan Electronic Technology (of which 1 doesn't sit too well with us!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.