The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Guangxi Wuzhou Zhongheng Group Co.,Ltd (SHSE:600252) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Guangxi Wuzhou Zhongheng GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Guangxi Wuzhou Zhongheng GroupLtd had CN¥1.74b of debt in September 2024, down from CN¥1.83b, one year before. But on the other hand it also has CN¥4.12b in cash, leading to a CN¥2.37b net cash position.

How Strong Is Guangxi Wuzhou Zhongheng GroupLtd's Balance Sheet?

According to the last reported balance sheet, Guangxi Wuzhou Zhongheng GroupLtd had liabilities of CN¥2.36b due within 12 months, and liabilities of CN¥853.5m due beyond 12 months. On the other hand, it had cash of CN¥4.12b and CN¥1.42b worth of receivables due within a year. So it actually has CN¥2.32b more liquid assets than total liabilities.

This excess liquidity suggests that Guangxi Wuzhou Zhongheng GroupLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Guangxi Wuzhou Zhongheng GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangxi Wuzhou Zhongheng GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Guangxi Wuzhou Zhongheng GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 4.4%, to CN¥2.9b. We would much prefer see growth.

So How Risky Is Guangxi Wuzhou Zhongheng GroupLtd?

Although Guangxi Wuzhou Zhongheng GroupLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥299m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Guangxi Wuzhou Zhongheng GroupLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.