Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that GRG Banking Equipment Co., Ltd. (SZSE:002152) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does GRG Banking Equipment Carry?

The image below, which you can click on for greater detail, shows that at March 2024 GRG Banking Equipment had debt of CN¥1.20b, up from CN¥462.9m in one year. But it also has CN¥10.7b in cash to offset that, meaning it has CN¥9.51b net cash.

How Healthy Is GRG Banking Equipment's Balance Sheet?

The latest balance sheet data shows that GRG Banking Equipment had liabilities of CN¥9.73b due within a year, and liabilities of CN¥529.2m falling due after that. On the other hand, it had cash of CN¥10.7b and CN¥2.94b worth of receivables due within a year. 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, a company can only pay off debt with cold hard cash, not accounting profits. GRG Banking Equipment 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. Over the last three years, GRG Banking Equipment actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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. And it impressed us with free cash flow of CN¥1.2b, being 132% of its EBIT. So is GRG Banking Equipment's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for GRG Banking Equipment that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.