Here's Why Guangzhou Haozhi IndustrialLtd (SZSE:300503) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Haozhi Industrial Co.,Ltd. (SZSE:300503) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Guangzhou Haozhi IndustrialLtd

What Is Guangzhou Haozhi IndustrialLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Guangzhou Haozhi IndustrialLtd had debt of CN¥696.8m at the end of September 2023, a reduction from CN¥771.6m over a year. However, because it has a cash reserve of CN¥79.4m, its net debt is less, at about CN¥617.5m.

How Strong Is Guangzhou Haozhi IndustrialLtd's Balance Sheet?

According to the last reported balance sheet, Guangzhou Haozhi IndustrialLtd had liabilities of CN¥758.8m due within 12 months, and liabilities of CN¥582.5m due beyond 12 months. On the other hand, it had cash of CN¥79.4m and CN¥477.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥784.1m.

Of course, Guangzhou Haozhi IndustrialLtd has a market capitalization of CN¥4.83b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Guangzhou Haozhi IndustrialLtd'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 Haozhi IndustrialLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 2.9%, to CN¥957m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Guangzhou Haozhi IndustrialLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥32m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥42m into a profit. So to be blunt we do think it is 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. To that end, you should be aware of the 2 warning signs we've spotted with Guangzhou Haozhi IndustrialLtd .

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.

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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.