Guangdong Chj IndustryLtd (SZSE:002345) Seems To Use Debt Rather Sparingly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Guangdong Chj Industry Co.,Ltd. (SZSE:002345) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Guangdong Chj IndustryLtd

What Is Guangdong Chj IndustryLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Guangdong Chj IndustryLtd had debt of CN¥484.5m at the end of June 2024, a reduction from CN¥741.3m over a year. However, its balance sheet shows it holds CN¥784.3m in cash, so it actually has CN¥299.8m net cash.

How Healthy Is Guangdong Chj IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong Chj IndustryLtd had liabilities of CN¥1.82b due within a year, and liabilities of CN¥188.0m falling due after that. Offsetting this, it had CN¥784.3m in cash and CN¥322.2m in receivables that were due within 12 months. So it has liabilities totalling CN¥906.1m more than its cash and near-term receivables, combined.

Of course, Guangdong Chj IndustryLtd has a market capitalization of CN¥4.98b, 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. Despite its noteworthy liabilities, Guangdong Chj IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Guangdong Chj IndustryLtd grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guangdong Chj IndustryLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Guangdong Chj IndustryLtd generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Guangdong Chj IndustryLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥299.8m. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥409m. So is Guangdong Chj IndustryLtd's debt a risk? It doesn't seem so to us. 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. For example - Guangdong Chj IndustryLtd has 1 warning sign we think you should be aware of.

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.