These 4 Measures Indicate That Guangzhou Wondfo BiotechLtd (SZSE:300482) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Guangzhou Wondfo Biotech Co.,Ltd (SZSE:300482) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangzhou Wondfo BiotechLtd

What Is Guangzhou Wondfo BiotechLtd's Debt?

The chart below, which you can click on for greater detail, shows that Guangzhou Wondfo BiotechLtd had CN¥564.0m in debt in September 2024; about the same as the year before. However, it does have CN¥2.11b in cash offsetting this, leading to net cash of CN¥1.55b.

A Look At Guangzhou Wondfo BiotechLtd's Liabilities

The latest balance sheet data shows that Guangzhou Wondfo BiotechLtd had liabilities of CN¥504.8m due within a year, and liabilities of CN¥678.7m falling due after that. Offsetting this, it had CN¥2.11b in cash and CN¥960.4m in receivables that were due within 12 months. So it can boast CN¥1.89b more liquid assets than total liabilities.

This excess liquidity suggests that Guangzhou Wondfo BiotechLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Guangzhou Wondfo BiotechLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Guangzhou Wondfo BiotechLtd has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Guangzhou Wondfo BiotechLtd's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. Guangzhou Wondfo BiotechLtd 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. During the last three years, Guangzhou Wondfo BiotechLtd produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangzhou Wondfo BiotechLtd has net cash of CN¥1.55b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So we don't think Guangzhou Wondfo BiotechLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Guangzhou Wondfo BiotechLtd , and understanding them should be part of your investment process.

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.