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.' 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 Guangdong Ganhua Science & Industry Co.,Ltd. (SZSE:000576) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Guangdong Ganhua Science & IndustryLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangdong Ganhua Science & IndustryLtd had CN¥13.2m of debt, an increase on none, over one year. However, it does have CN¥354.4m in cash offsetting this, leading to net cash of CN¥341.2m.

How Strong Is Guangdong Ganhua Science & IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong Ganhua Science & IndustryLtd had liabilities of CN¥137.5m due within a year, and liabilities of CN¥85.8m falling due after that. On the other hand, it had cash of CN¥354.4m and CN¥333.5m worth of receivables due within a year. So it actually has CN¥464.6m more liquid assets than total liabilities.

This surplus suggests that Guangdong Ganhua Science & IndustryLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Guangdong Ganhua Science & IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangdong Ganhua Science & IndustryLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Guangdong Ganhua Science & IndustryLtd had a loss before interest and tax, and actually shrunk its revenue by 25%, to CN¥324m. To be frank that doesn't bode well.

So How Risky Is Guangdong Ganhua Science & IndustryLtd?

Although Guangdong Ganhua Science & IndustryLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥20m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 instance, we've identified 1 warning sign for Guangdong Ganhua Science & IndustryLtd that 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.

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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.