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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ganyuan Foods Co., Ltd. (SZSE:002991) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

What Is Ganyuan Foods's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ganyuan Foods had debt of CN¥40.0m, up from none in one year. However, its balance sheet shows it holds CN¥789.9m in cash, so it actually has CN¥749.9m net cash.

How Strong Is Ganyuan Foods' Balance Sheet?

We can see from the most recent balance sheet that Ganyuan Foods had liabilities of CN¥320.0m falling due within a year, and liabilities of CN¥121.7m due beyond that. Offsetting these obligations, it had cash of CN¥789.9m as well as receivables valued at CN¥57.5m due within 12 months. So it can boast CN¥405.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Ganyuan Foods could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ganyuan Foods has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Ganyuan Foods grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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 Ganyuan Foods can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ganyuan Foods 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. Looking at the most recent three years, Ganyuan Foods recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ganyuan Foods has CN¥749.9m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 13% in the last twelve months. So is Ganyuan Foods's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Ganyuan Foods (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.