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 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. As with many other companies Guangxi Wuzhou Zhongheng Group Co.,Ltd (SHSE:600252) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Guangxi Wuzhou Zhongheng GroupLtd
How Much Debt Does Guangxi Wuzhou Zhongheng GroupLtd Carry?
The image below, which you can click on for greater detail, shows that Guangxi Wuzhou Zhongheng GroupLtd had debt of CN¥1.55b at the end of June 2023, a reduction from CN¥2.02b over a year. But on the other hand it also has CN¥4.02b in cash, leading to a CN¥2.47b net cash position.
How Strong Is Guangxi Wuzhou Zhongheng GroupLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Guangxi Wuzhou Zhongheng GroupLtd had liabilities of CN¥2.28b due within 12 months and liabilities of CN¥865.9m due beyond that. Offsetting this, it had CN¥4.02b in cash and CN¥1.70b in receivables that were due within 12 months. So it can boast CN¥2.57b more liquid assets than total liabilities.
This excess liquidity suggests that Guangxi Wuzhou Zhongheng GroupLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues 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. There's no doubt that we learn most about debt from the balance sheet. But it is Guangxi Wuzhou Zhongheng GroupLtd's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, Guangxi Wuzhou Zhongheng GroupLtd reported revenue of CN¥3.0b, which is a gain of 22%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Guangxi Wuzhou Zhongheng GroupLtd?
While Guangxi Wuzhou Zhongheng GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥59m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 22% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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 3 warning signs for Guangxi Wuzhou Zhongheng GroupLtd (1 is significant) 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.
