Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Guangdong Guanhao High-Tech Co., Ltd. (SHSE:600433) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Guangdong Guanhao High-Tech
How Much Debt Does Guangdong Guanhao High-Tech Carry?
The image below, which you can click on for greater detail, shows that at September 2023 Guangdong Guanhao High-Tech had debt of CN¥2.21b, up from CN¥991.8m in one year. However, it also had CN¥1.52b in cash, and so its net debt is CN¥684.3m.
How Healthy Is Guangdong Guanhao High-Tech's Balance Sheet?
According to the last reported balance sheet, Guangdong Guanhao High-Tech had liabilities of CN¥3.66b due within 12 months, and liabilities of CN¥668.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.52b as well as receivables valued at CN¥1.68b due within 12 months. So its liabilities total CN¥1.13b more than the combination of its cash and short-term receivables.
Given Guangdong Guanhao High-Tech has a market capitalization of CN¥5.77b, it's hard to believe these liabilities pose much threat. 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 Guanhao High-Tech's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Guangdong Guanhao High-Tech wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to CN¥7.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate Guangdong Guanhao High-Tech's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥140m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥549m in negative free cash flow over the last twelve months. So in short it's a really risky 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 2 warning signs for Guangdong Guanhao High-Tech (1 is a bit unpleasant) 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.
