Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Guangzhou Haozhi Industrial Co.,Ltd. (SZSE:300503) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is Guangzhou Haozhi IndustrialLtd's Net Debt?
As you can see below, Guangzhou Haozhi IndustrialLtd had CN¥707.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥68.5m in cash leading to net debt of about CN¥638.5m.
How Healthy Is Guangzhou Haozhi IndustrialLtd's Balance Sheet?
According to the last reported balance sheet, Guangzhou Haozhi IndustrialLtd had liabilities of CN¥822.8m due within 12 months, and liabilities of CN¥530.5m due beyond 12 months. On the other hand, it had cash of CN¥68.5m and CN¥545.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥739.0m.
Given Guangzhou Haozhi IndustrialLtd has a market capitalization of CN¥3.80b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangzhou Haozhi IndustrialLtd'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.
In the last year Guangzhou Haozhi IndustrialLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥1.1b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Guangzhou Haozhi IndustrialLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥40m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥3.5m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Guangzhou Haozhi IndustrialLtd is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.