Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Guangxi Wuzhou Zhongheng Group Co.,Ltd (SHSE:600252) makes use of 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Guangxi Wuzhou Zhongheng GroupLtd Carry?
As you can see below, at the end of June 2024, Guangxi Wuzhou Zhongheng GroupLtd had CN¥1.92b of debt, up from CN¥1.55b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.24b in cash, so it actually has CN¥2.32b net cash.
How Healthy Is Guangxi Wuzhou Zhongheng GroupLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Guangxi Wuzhou Zhongheng GroupLtd had liabilities of CN¥2.61b due within 12 months and liabilities of CN¥742.1m due beyond that. On the other hand, it had cash of CN¥4.24b and CN¥1.69b worth of receivables due within a year. So it actually has CN¥2.59b more liquid assets than total liabilities.
This excess liquidity is a great indication that Guangxi Wuzhou Zhongheng GroupLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Guangxi Wuzhou Zhongheng GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangxi Wuzhou Zhongheng GroupLtd 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, Guangxi Wuzhou Zhongheng GroupLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
So How Risky Is Guangxi Wuzhou Zhongheng GroupLtd?
Although Guangxi Wuzhou Zhongheng GroupLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥18m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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, we've discovered 3 warning signs for Guangxi Wuzhou Zhongheng GroupLtd (1 can't be ignored!) that you should be aware of before investing here.
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.