Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Greatoo Intelligent Equipment Inc. (SZSE:002031) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
See our latest analysis for Greatoo Intelligent Equipment
What Is Greatoo Intelligent Equipment's Debt?
The image below, which you can click on for greater detail, shows that Greatoo Intelligent Equipment had debt of CN¥1.15b at the end of June 2023, a reduction from CN¥1.32b over a year. However, it does have CN¥87.4m in cash offsetting this, leading to net debt of about CN¥1.06b.
How Strong Is Greatoo Intelligent Equipment's Balance Sheet?
The latest balance sheet data shows that Greatoo Intelligent Equipment had liabilities of CN¥1.09b due within a year, and liabilities of CN¥501.8m falling due after that. Offsetting this, it had CN¥87.4m in cash and CN¥898.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥602.4m more than its cash and near-term receivables, combined.
Since publicly traded Greatoo Intelligent Equipment shares are worth a total of CN¥7.72b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Greatoo Intelligent Equipment's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Greatoo Intelligent Equipment had a loss before interest and tax, and actually shrunk its revenue by 45%, to CN¥877m. That makes us nervous, to say the least.
Caveat Emptor
While Greatoo Intelligent Equipment's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥21m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥434m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 4 warning signs for Greatoo Intelligent Equipment (2 are concerning) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
