Guangdong Chj IndustryLtd (SZSE:002345) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Guangdong Chj Industry Co.,Ltd. (SZSE:002345) does use debt in its business. But is this debt a concern to shareholders?

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 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, 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Guangdong Chj IndustryLtd

What Is Guangdong Chj IndustryLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Guangdong Chj IndustryLtd had CN¥471.6m of debt in September 2024, down from CN¥705.7m, one year before. However, it does have CN¥645.6m in cash offsetting this, leading to net cash of CN¥173.9m.

How Strong Is Guangdong Chj IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong Chj IndustryLtd had liabilities of CN¥1.90b due within a year, and liabilities of CN¥178.8m falling due after that. Offsetting these obligations, it had cash of CN¥645.6m as well as receivables valued at CN¥318.1m due within 12 months. So it has liabilities totalling CN¥1.11b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Guangdong Chj IndustryLtd has a market capitalization of CN¥5.03b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Guangdong Chj IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Guangdong Chj IndustryLtd grew its EBIT by 8.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Guangdong Chj IndustryLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Guangdong Chj IndustryLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Guangdong Chj IndustryLtd recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Guangdong Chj IndustryLtd does have more liabilities than liquid assets, it also has net cash of CN¥173.9m. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥416m. So we don't think Guangdong Chj IndustryLtd's use of debt is risky. 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 1 warning sign we've spotted with Guangdong Chj IndustryLtd .

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.