Does Guangdong Guanghong HoldingsLtd (SZSE:000529) Have A Healthy Balance Sheet?

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.' 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 Guanghong Holdings Co.,Ltd. (SZSE:000529) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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 Guanghong HoldingsLtd

What Is Guangdong Guanghong HoldingsLtd's Net Debt?

As you can see below, Guangdong Guanghong HoldingsLtd had CN¥1.90b of debt at September 2024, down from CN¥2.61b a year prior. However, it does have CN¥2.52b in cash offsetting this, leading to net cash of CN¥620.3m.

A Look At Guangdong Guanghong HoldingsLtd's Liabilities

According to the last reported balance sheet, Guangdong Guanghong HoldingsLtd had liabilities of CN¥1.52b due within 12 months, and liabilities of CN¥1.57b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.52b as well as receivables valued at CN¥69.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥494.7m.

Given Guangdong Guanghong HoldingsLtd has a market capitalization of CN¥3.70b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Guangdong Guanghong HoldingsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangdong Guanghong HoldingsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Guangdong Guanghong HoldingsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.6b, which is a fall of 7.1%. We would much prefer see growth.

So How Risky Is Guangdong Guanghong HoldingsLtd?

While Guangdong Guanghong HoldingsLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥140m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Guangdong Guanghong HoldingsLtd is showing 3 warning signs in our investment analysis , you should know about...

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.