Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Guangdong Guanghua Sci-Tech Co., Ltd. (SZSE:002741) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Guangdong Guanghua Sci-Tech

How Much Debt Does Guangdong Guanghua Sci-Tech Carry?

The chart below, which you can click on for greater detail, shows that Guangdong Guanghua Sci-Tech had CN¥997.1m in debt in September 2023; about the same as the year before. On the flip side, it has CN¥526.1m in cash leading to net debt of about CN¥470.9m.

A Look At Guangdong Guanghua Sci-Tech's Liabilities

We can see from the most recent balance sheet that Guangdong Guanghua Sci-Tech had liabilities of CN¥1.71b falling due within a year, and liabilities of CN¥385.8m due beyond that. Offsetting these obligations, it had cash of CN¥526.1m as well as receivables valued at CN¥766.2m due within 12 months. So its liabilities total CN¥805.9m more than the combination of its cash and short-term receivables.

Of course, Guangdong Guanghua Sci-Tech has a market capitalization of CN¥5.42b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Guangdong Guanghua Sci-Tech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Guangdong Guanghua Sci-Tech made a loss at the EBIT level, and saw its revenue drop to CN¥2.6b, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

While Guangdong Guanghua Sci-Tech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥230m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥270m into a profit. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Guangdong Guanghua Sci-Tech's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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.