Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Guangzhou Goaland Energy Conservation Tech. Co., Ltd. (SZSE:300499) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Guangzhou Goaland Energy Conservation Tech's Net Debt?

As you can see below, Guangzhou Goaland Energy Conservation Tech had CN¥11.0m of debt at March 2024, down from CN¥176.0m a year prior. But it also has CN¥187.6m in cash to offset that, meaning it has CN¥176.7m net cash.

A Look At Guangzhou Goaland Energy Conservation Tech's Liabilities

We can see from the most recent balance sheet that Guangzhou Goaland Energy Conservation Tech had liabilities of CN¥313.0m falling due within a year, and liabilities of CN¥22.3m due beyond that. On the other hand, it had cash of CN¥187.6m and CN¥431.7m worth of receivables due within a year. So it actually has CN¥283.9m more liquid assets than total liabilities.

This surplus suggests that Guangzhou Goaland Energy Conservation Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guangzhou Goaland Energy Conservation Tech boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangzhou Goaland Energy Conservation Tech'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.

In the last year Guangzhou Goaland Energy Conservation Tech had a loss before interest and tax, and actually shrunk its revenue by 63%, to CN¥601m. That makes us nervous, to say the least.

So How Risky Is Guangzhou Goaland Energy Conservation Tech?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Guangzhou Goaland Energy Conservation Tech had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥21m of cash and made a loss of CN¥20m. With only CN¥176.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Guangzhou Goaland Energy Conservation Tech's profit, revenue, and operating cashflow have changed over the last few years.

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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