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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Guangxi Oriental Intelligent Manufacturing Technology Co., Ltd. (SZSE:002175) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Guangxi Oriental Intelligent Manufacturing Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangxi Oriental Intelligent Manufacturing Technology had CN¥37.2m of debt, an increase on none, over one year. But it also has CN¥176.8m in cash to offset that, meaning it has CN¥139.6m net cash.

How Strong Is Guangxi Oriental Intelligent Manufacturing Technology's Balance Sheet?

We can see from the most recent balance sheet that Guangxi Oriental Intelligent Manufacturing Technology had liabilities of CN¥147.1m falling due within a year, and liabilities of CN¥48.8m due beyond that. Offsetting this, it had CN¥176.8m in cash and CN¥71.0m in receivables that were due within 12 months. So it can boast CN¥52.0m more liquid assets than total liabilities.

This state of affairs indicates that Guangxi Oriental Intelligent Manufacturing Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥6.49b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Guangxi Oriental Intelligent Manufacturing Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Guangxi Oriental Intelligent Manufacturing Technology grew its EBIT by 11,698% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangxi Oriental Intelligent Manufacturing Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Guangxi Oriental Intelligent Manufacturing Technology 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, Guangxi Oriental Intelligent Manufacturing Technology reported free cash flow worth 11% 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 Guangxi Oriental Intelligent Manufacturing Technology has CN¥139.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 11,698% year-on-year EBIT growth. So we don't think Guangxi Oriental Intelligent Manufacturing Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Guangxi Oriental Intelligent Manufacturing Technology is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.