Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Guangdong Guanhao High-Tech Co., Ltd. (SHSE:600433) does use debt in its business. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Guangdong Guanhao High-Tech Carry?
As you can see below, at the end of June 2024, Guangdong Guanhao High-Tech had CN¥2.63b of debt, up from CN¥2.07b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥1.01b, its net debt is less, at about CN¥1.63b.
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How Healthy Is Guangdong Guanhao High-Tech's Balance Sheet?
The latest balance sheet data shows that Guangdong Guanhao High-Tech had liabilities of CN¥3.36b due within a year, and liabilities of CN¥1.28b falling due after that. Offsetting these obligations, it had cash of CN¥1.01b as well as receivables valued at CN¥1.48b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.16b.
Guangdong Guanhao High-Tech 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangdong Guanhao High-Tech will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Guangdong Guanhao High-Tech made a loss at the EBIT level, and saw its revenue drop to CN¥7.4b, which is a fall of 4.0%. We would much prefer see growth.
Caveat Emptor
Importantly, Guangdong Guanhao High-Tech had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥29m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥720m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Guangdong Guanhao High-Tech has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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.