Does Guangxi Guiguan Electric PowerCo.Ltd (SHSE:600236) Have A Healthy Balance Sheet?

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. Importantly, Guangxi Guiguan Electric PowerCo.,Ltd. (SHSE:600236) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Guangxi Guiguan Electric PowerCo.Ltd

How Much Debt Does Guangxi Guiguan Electric PowerCo.Ltd Carry?

The chart below, which you can click on for greater detail, shows that Guangxi Guiguan Electric PowerCo.Ltd had CN¥21.0b in debt in September 2024; about the same as the year before. However, it also had CN¥1.40b in cash, and so its net debt is CN¥19.6b.

How Healthy Is Guangxi Guiguan Electric PowerCo.Ltd's Balance Sheet?

The latest balance sheet data shows that Guangxi Guiguan Electric PowerCo.Ltd had liabilities of CN¥13.6b due within a year, and liabilities of CN¥10.5b falling due after that. Offsetting these obligations, it had cash of CN¥1.40b as well as receivables valued at CN¥1.96b due within 12 months. So it has liabilities totalling CN¥20.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Guangxi Guiguan Electric PowerCo.Ltd is worth CN¥49.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt to EBITDA of 3.5 Guangxi Guiguan Electric PowerCo.Ltd has a fairly noticeable amount of debt. But the high interest coverage of 7.2 suggests it can easily service that debt. Importantly, Guangxi Guiguan Electric PowerCo.Ltd grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangxi Guiguan Electric PowerCo.Ltd'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. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Guangxi Guiguan Electric PowerCo.Ltd's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

When it comes to the balance sheet, the standout positive for Guangxi Guiguan Electric PowerCo.Ltd was the fact that it seems able to grow its EBIT confidently. But the other factors we noted above weren't so encouraging. For example, its net debt to EBITDA makes us a little nervous about its debt. When we consider all the elements mentioned above, it seems to us that Guangxi Guiguan Electric PowerCo.Ltd is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. Be aware that Guangxi Guiguan Electric PowerCo.Ltd is showing 2 warning signs in our investment analysis , 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.

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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.