David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Zhanjiang Guolian Aquatic Products Co., Ltd. (SZSE:300094) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Zhanjiang Guolian Aquatic Products's Debt?
You can click the graphic below for the historical numbers, but it shows that Zhanjiang Guolian Aquatic Products had CN¥1.51b of debt in September 2023, down from CN¥1.83b, one year before. However, it does have CN¥440.7m in cash offsetting this, leading to net debt of about CN¥1.07b.
A Look At Zhanjiang Guolian Aquatic Products' Liabilities
According to the last reported balance sheet, Zhanjiang Guolian Aquatic Products had liabilities of CN¥1.83b due within 12 months, and liabilities of CN¥431.7m due beyond 12 months. On the other hand, it had cash of CN¥440.7m and CN¥500.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.32b.
Zhanjiang Guolian Aquatic Products has a market capitalization of CN¥4.72b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Zhanjiang Guolian Aquatic Products 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 Zhanjiang Guolian Aquatic Products's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Importantly, Zhanjiang Guolian Aquatic Products had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥65m 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¥201m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Be aware that Zhanjiang Guolian Aquatic Products is showing 2 warning signs in our investment analysis , and 1 of those is concerning...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.