Is Guangdong Yuehai Feeds GroupLtd (SZSE:001313) A Risky Investment?

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. Importantly, Guangdong Yuehai Feeds Group Co.,Ltd. (SZSE:001313) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider 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¥632.4m of debt at September 2024, down from CN¥1.39b a year prior. However, it does have CN¥628.7m in cash offsetting this, leading to net debt of about CN¥3.76m.

How Strong Is Guangdong Yuehai Feeds GroupLtd's Balance Sheet?

According to the last reported balance sheet, Guangdong Yuehai Feeds GroupLtd had liabilities of CN¥2.16b due within 12 months, and liabilities of CN¥169.1m due beyond 12 months. Offsetting this, it had CN¥628.7m in cash and CN¥1.96b in receivables that were due within 12 months. So it actually has CN¥250.7m 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. Carrying virtually no net debt, Guangdong Yuehai Feeds GroupLtd has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangdong Yuehai Feeds GroupLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Guangdong Yuehai Feeds GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥6.0b. That's not what we would hope to see.

Caveat Emptor

Not only did Guangdong Yuehai Feeds GroupLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥12m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Guangdong Yuehai Feeds GroupLtd (1 can't be ignored!) that you should be aware of before investing here.

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.