Does Guangzhou Zhiguang ElectricLtd (SZSE:002169) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Zhiguang Electric Co.,Ltd. (SZSE:002169) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangzhou Zhiguang ElectricLtd

How Much Debt Does Guangzhou Zhiguang ElectricLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Guangzhou Zhiguang ElectricLtd had CN¥2.36b of debt, an increase on CN¥1.35b, over one year. However, it also had CN¥894.4m in cash, and so its net debt is CN¥1.47b.

How Healthy Is Guangzhou Zhiguang ElectricLtd's Balance Sheet?

The latest balance sheet data shows that Guangzhou Zhiguang ElectricLtd had liabilities of CN¥3.66b due within a year, and liabilities of CN¥1.90b falling due after that. Offsetting these obligations, it had cash of CN¥894.4m as well as receivables valued at CN¥2.22b due within 12 months. So it has liabilities totalling CN¥2.44b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥3.87b, so it does suggest shareholders should keep an eye on Guangzhou Zhiguang ElectricLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangzhou Zhiguang ElectricLtd'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.

Over 12 months, Guangzhou Zhiguang ElectricLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.7b, which is a fall of 4.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Guangzhou Zhiguang ElectricLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥26m 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. Another cause for caution is that is bled CN¥1.3b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should be aware of the 3 warning signs we've spotted with Guangzhou Zhiguang ElectricLtd .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.