Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Guomai Technologies, Inc. (SZSE:002093) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Guomai Technologies Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guomai Technologies had CN¥281.3m of debt, an increase on CN¥91.1m, over one year. However, it does have CN¥720.8m in cash offsetting this, leading to net cash of CN¥439.5m.
A Look At Guomai Technologies' Liabilities
The latest balance sheet data shows that Guomai Technologies had liabilities of CN¥468.7m due within a year, and liabilities of CN¥323.7m falling due after that. Offsetting this, it had CN¥720.8m in cash and CN¥306.9m in receivables that were due within 12 months. So it can boast CN¥235.3m more liquid assets than total liabilities.
This surplus suggests that Guomai Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guomai Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Guomai Technologies grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Guomai Technologies 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 Guomai Technologies 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. Over the last three years, Guomai Technologies saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Guomai Technologies has net cash of CN¥439.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't have any problem with Guomai Technologies's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Guomai Technologies has 2 warning signs we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com