Does Guangzhou Guangri StockLtd (SHSE:600894) Have A Healthy Balance Sheet?

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.' 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. We note that Guangzhou Guangri Stock Co.,Ltd. (SHSE:600894) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Guangzhou Guangri StockLtd

How Much Debt Does Guangzhou Guangri StockLtd Carry?

As you can see below, Guangzhou Guangri StockLtd had CN¥64.7m of debt at September 2023, down from CN¥85.9m a year prior. But on the other hand it also has CN¥4.40b in cash, leading to a CN¥4.33b net cash position.

A Look At Guangzhou Guangri StockLtd's Liabilities

According to the last reported balance sheet, Guangzhou Guangri StockLtd had liabilities of CN¥4.84b due within 12 months, and liabilities of CN¥170.8m due beyond 12 months. On the other hand, it had cash of CN¥4.40b and CN¥2.62b worth of receivables due within a year. So it can boast CN¥2.01b more liquid assets than total liabilities.

It's good to see that Guangzhou Guangri StockLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Guangzhou Guangri StockLtd 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 it is Guangzhou Guangri StockLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Guangzhou Guangri StockLtd had a loss before interest and tax, and actually shrunk its revenue by 4.0%, to CN¥7.1b. That's not what we would hope to see.

So How Risky Is Guangzhou Guangri StockLtd?

Although Guangzhou Guangri StockLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥584m. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Guangzhou Guangri StockLtd .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.