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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Guodian Nanjing Automation Co., Ltd. (SHSE:600268) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Guodian Nanjing Automation's Net Debt?

As you can see below, Guodian Nanjing Automation had CN¥441.8m of debt at September 2024, down from CN¥1.08b a year prior. However, its balance sheet shows it holds CN¥1.94b in cash, so it actually has CN¥1.50b net cash.

How Strong Is Guodian Nanjing Automation's Balance Sheet?

We can see from the most recent balance sheet that Guodian Nanjing Automation had liabilities of CN¥5.84b falling due within a year, and liabilities of CN¥335.0m due beyond that. On the other hand, it had cash of CN¥1.94b and CN¥4.40b worth of receivables due within a year. So it can boast CN¥168.9m more liquid assets than total liabilities.

This surplus suggests that Guodian Nanjing Automation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guodian Nanjing Automation boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Guodian Nanjing Automation has been able to increase its EBIT by 27% in twelve months, making it easier to pay down 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 Guodian Nanjing Automation 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 Guodian Nanjing Automation 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, Guodian Nanjing Automation 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 we empathize with investors who find debt concerning, you should keep in mind that Guodian Nanjing Automation has net cash of CN¥1.50b, as well as more liquid assets than liabilities. The cherry on top was that in converted 160% of that EBIT to free cash flow, bringing in CN¥1.6b. So is Guodian Nanjing Automation's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Guodian Nanjing Automation that 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.