Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Guangzhou Haige Communications Group Incorporated Company (SZSE:002465) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Guangzhou Haige Communications Group's Net Debt?

As you can see below, at the end of September 2024, Guangzhou Haige Communications Group had CN¥3.17b of debt, up from CN¥1.21b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.18b in cash, so it actually has CN¥2.00b net cash.

How Healthy Is Guangzhou Haige Communications Group's Balance Sheet?

We can see from the most recent balance sheet that Guangzhou Haige Communications Group had liabilities of CN¥6.07b falling due within a year, and liabilities of CN¥1.53b due beyond that. Offsetting these obligations, it had cash of CN¥5.18b as well as receivables valued at CN¥7.62b due within 12 months. So it actually has CN¥5.20b more liquid assets than total liabilities.

It's good to see that Guangzhou Haige Communications Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Guangzhou Haige Communications Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Guangzhou Haige Communications Group's load is not too heavy, because its EBIT was down 41% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Guangzhou Haige Communications 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Guangzhou Haige Communications 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. During the last three years, Guangzhou Haige Communications Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangzhou Haige Communications Group has CN¥2.00b in net cash and a decent-looking balance sheet. So we are not troubled with Guangzhou Haige Communications Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Guangzhou Haige Communications Group .

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.