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. We can see that Guangdong Create Century Intelligent Equipment Group Corporation Limited (SZSE:300083) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Guangdong Create Century Intelligent Equipment Group

What Is Guangdong Create Century Intelligent Equipment Group's Net Debt?

As you can see below, Guangdong Create Century Intelligent Equipment Group had CN¥1.39b of debt at March 2022, down from CN¥2.59b a year prior. However, its balance sheet shows it holds CN¥1.40b in cash, so it actually has CN¥5.93m net cash.

How Strong Is Guangdong Create Century Intelligent Equipment Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Create Century Intelligent Equipment Group had liabilities of CN¥4.25b due within 12 months and liabilities of CN¥2.02b due beyond that. Offsetting this, it had CN¥1.40b in cash and CN¥1.88b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.99b more than its cash and near-term receivables, combined.

Since publicly traded Guangdong Create Century Intelligent Equipment Group shares are worth a total of CN¥16.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Guangdong Create Century Intelligent Equipment Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Guangdong Create Century Intelligent Equipment Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥850m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Guangdong Create Century Intelligent Equipment Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Guangdong Create Century Intelligent Equipment Group 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 year, Guangdong Create Century Intelligent Equipment Group reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

Although Guangdong Create Century Intelligent Equipment Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥5.93m. So we are not troubled with Guangdong Create Century Intelligent Equipment Group's debt use. 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. For example - Guangdong Create Century Intelligent Equipment Group has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.