Would Zhanjiang Guolian Aquatic Products (SZSE:300094) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Zhanjiang Guolian Aquatic Products Co., Ltd. (SZSE:300094) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhanjiang Guolian Aquatic Products

What Is Zhanjiang Guolian Aquatic Products's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhanjiang Guolian Aquatic Products had CN¥1.58b of debt, an increase on CN¥1.51b, over one year. However, because it has a cash reserve of CN¥503.5m, its net debt is less, at about CN¥1.08b.

How Strong Is Zhanjiang Guolian Aquatic Products' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhanjiang Guolian Aquatic Products had liabilities of CN¥1.95b due within 12 months and liabilities of CN¥261.8m due beyond that. On the other hand, it had cash of CN¥503.5m and CN¥514.6m worth of receivables due within a year. So it has liabilities totalling CN¥1.19b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Zhanjiang Guolian Aquatic Products has a market capitalization of CN¥4.03b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Zhanjiang Guolian Aquatic Products's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Zhanjiang Guolian Aquatic Products had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥4.0b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Zhanjiang Guolian Aquatic Products's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥417m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥376m into a profit. In the meantime, we consider the stock very risky. 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. For instance, we've identified 1 warning sign for Zhanjiang Guolian Aquatic Products that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.