Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Guangzhou Guangri Stock Co.,Ltd. (SHSE:600894) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Guangzhou Guangri StockLtd's Debt?
As you can see below, at the end of June 2024, Guangzhou Guangri StockLtd had CN¥87.7m of debt, up from CN¥53.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥4.81b in cash, leading to a CN¥4.72b net cash position.
How Strong Is Guangzhou Guangri StockLtd's Balance Sheet?
The latest balance sheet data shows that Guangzhou Guangri StockLtd had liabilities of CN¥4.71b due within a year, and liabilities of CN¥172.8m falling due after that. On the other hand, it had cash of CN¥4.81b and CN¥2.59b worth of receivables due within a year. So it can boast CN¥2.52b more liquid assets than total liabilities.
This surplus suggests that Guangzhou Guangri StockLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Guangzhou Guangri StockLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guangzhou Guangri StockLtd 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 Guangzhou Guangri StockLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 7.4%, to CN¥7.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Guangzhou Guangri StockLtd?
While Guangzhou Guangri StockLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥700m. So taking that on face value, and considering the cash, we don't think its very 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Guangzhou Guangri StockLtd you should know about.
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.
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.