Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Guangdong Mingyang Electric Co.,Ltd. (SZSE:301291) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Guangdong Mingyang ElectricLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Guangdong Mingyang ElectricLtd had CN¥47.6m of debt in September 2024, down from CN¥426.9m, one year before. However, it does have CN¥2.00b in cash offsetting this, leading to net cash of CN¥1.95b.

A Look At Guangdong Mingyang ElectricLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangdong Mingyang ElectricLtd had liabilities of CN¥4.04b due within 12 months and liabilities of CN¥32.8m due beyond that. Offsetting this, it had CN¥2.00b in cash and CN¥3.34b in receivables that were due within 12 months. So it can boast CN¥1.26b more liquid assets than total liabilities.

This short term liquidity is a sign that Guangdong Mingyang ElectricLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Guangdong Mingyang ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Guangdong Mingyang ElectricLtd has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guangdong Mingyang ElectricLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Guangdong Mingyang ElectricLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Guangdong Mingyang ElectricLtd reported free cash flow worth 15% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Mingyang ElectricLtd has CN¥1.95b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 43% over the last year. So we don't think Guangdong Mingyang ElectricLtd's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Guangdong Mingyang ElectricLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.