Here's Why Guangdong Yuehai Feeds GroupLtd (SZSE:001313) Has A Meaningful Debt Burden

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.' 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 note that Guangdong Yuehai Feeds Group Co.,Ltd. (SZSE:001313) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Guangdong Yuehai Feeds GroupLtd

What Is Guangdong Yuehai Feeds GroupLtd's Debt?

As you can see below, Guangdong Yuehai Feeds GroupLtd had CN¥712.0m of debt at June 2024, down from CN¥1.38b a year prior. But on the other hand it also has CN¥896.7m in cash, leading to a CN¥184.7m net cash position.

A Look At Guangdong Yuehai Feeds GroupLtd's Liabilities

The latest balance sheet data shows that Guangdong Yuehai Feeds GroupLtd had liabilities of CN¥2.03b due within a year, and liabilities of CN¥169.6m falling due after that. Offsetting this, it had CN¥896.7m in cash and CN¥1.54b in receivables that were due within 12 months. So it can boast CN¥235.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Guangdong Yuehai Feeds GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guangdong Yuehai Feeds GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Guangdong Yuehai Feeds GroupLtd's EBIT fell a jaw-dropping 84% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guangdong Yuehai Feeds GroupLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Guangdong Yuehai Feeds GroupLtd 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 Yuehai Feeds GroupLtd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Yuehai Feeds GroupLtd has CN¥184.7m in net cash and a decent-looking balance sheet. Despite the cash, we do find Guangdong Yuehai Feeds GroupLtd's EBIT growth rate concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Guangdong Yuehai Feeds GroupLtd is showing 3 warning signs in our investment analysis , you should know about...

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.