Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Guangdong Insight Brand Marketing Group Co.,Ltd. (SZSE:300781) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Guangdong Insight Brand Marketing GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Guangdong Insight Brand Marketing GroupLtd had CN¥30.4m of debt in March 2024, down from CN¥34.8m, one year before. However, its balance sheet shows it holds CN¥279.3m in cash, so it actually has CN¥248.9m net cash.

A Look At Guangdong Insight Brand Marketing GroupLtd's Liabilities

According to the last reported balance sheet, Guangdong Insight Brand Marketing GroupLtd had liabilities of CN¥248.2m due within 12 months, and liabilities of CN¥14.6m due beyond 12 months. Offsetting this, it had CN¥279.3m in cash and CN¥339.3m in receivables that were due within 12 months. So it can boast CN¥355.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Guangdong Insight Brand Marketing GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guangdong Insight Brand Marketing GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Guangdong Insight Brand Marketing GroupLtd grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangdong Insight Brand Marketing GroupLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangdong Insight Brand Marketing GroupLtd 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. Happily for any shareholders, Guangdong Insight Brand Marketing GroupLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangdong Insight Brand Marketing GroupLtd has net cash of CN¥248.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in CN¥52m. So we don't think Guangdong Insight Brand Marketing GroupLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Guangdong Insight Brand Marketing GroupLtd is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.

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