David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Chengdu Guibao Science & Technology Co.,Ltd. (SZSE:300019) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Chengdu Guibao Science & TechnologyLtd

What Is Chengdu Guibao Science & TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Chengdu Guibao Science & TechnologyLtd had CN¥90.0m of debt in March 2022, down from CN¥239.5m, one year before. But it also has CN¥698.7m in cash to offset that, meaning it has CN¥608.7m net cash.

A Look At Chengdu Guibao Science & TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Chengdu Guibao Science & TechnologyLtd had liabilities of CN¥624.0m falling due within a year, and liabilities of CN¥32.5m due beyond that. Offsetting this, it had CN¥698.7m in cash and CN¥826.8m in receivables that were due within 12 months. So it can boast CN¥869.0m more liquid assets than total liabilities.

This surplus suggests that Chengdu Guibao Science & TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Chengdu Guibao Science & TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Chengdu Guibao Science & TechnologyLtd grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chengdu Guibao Science & TechnologyLtd's ability to maintain a healthy balance sheet going forward. 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. Chengdu Guibao Science & TechnologyLtd 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, Chengdu Guibao Science & TechnologyLtd reported free cash flow worth 20% 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

While we empathize with investors who find debt concerning, you should keep in mind that Chengdu Guibao Science & TechnologyLtd has net cash of CN¥608.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 19% year-on-year EBIT growth. So we don't think Chengdu Guibao Science & TechnologyLtd'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. For example Chengdu Guibao Science & TechnologyLtd has 3 warning signs (and 1 which is significant) we think you should know about.

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.