Does Ganyuan Foods (SZSE:002991) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Ganyuan Foods Co., Ltd. (SZSE:002991) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ganyuan Foods

What Is Ganyuan Foods's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ganyuan Foods had debt of CN¥40.0m, up from none in one year. But on the other hand it also has CN¥789.9m in cash, leading to a CN¥749.9m net cash position.

How Strong Is Ganyuan Foods' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ganyuan Foods had liabilities of CN¥320.0m due within 12 months and liabilities of CN¥121.7m due beyond that. Offsetting these obligations, it had cash of CN¥789.9m as well as receivables valued at CN¥57.5m due within 12 months. So it actually has CN¥405.7m more liquid assets than total liabilities.

This surplus suggests that Ganyuan Foods has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ganyuan Foods boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Ganyuan Foods grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ganyuan Foods 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ganyuan Foods has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Ganyuan Foods recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ganyuan Foods has net cash of CN¥749.9m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't think Ganyuan Foods's use of debt is risky. 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 Ganyuan Foods is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.