Is Guizhou ChitianhuaLtd (SHSE:600227) Using Too Much Debt?

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. We can see that Guizhou Chitianhua Co.,Ltd. (SHSE:600227) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Guizhou ChitianhuaLtd

How Much Debt Does Guizhou ChitianhuaLtd Carry?

As you can see below, Guizhou ChitianhuaLtd had CN¥1.07b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥288.7m in cash offsetting this, leading to net debt of about CN¥784.8m.

A Look At Guizhou ChitianhuaLtd's Liabilities

According to the last reported balance sheet, Guizhou ChitianhuaLtd had liabilities of CN¥1.72b due within 12 months, and liabilities of CN¥528.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥288.7m as well as receivables valued at CN¥186.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.77b.

This deficit isn't so bad because Guizhou ChitianhuaLtd is worth CN¥3.58b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guizhou ChitianhuaLtd 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.

Over 12 months, Guizhou ChitianhuaLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Guizhou ChitianhuaLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥150m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of CN¥154m and a profit of CN¥2.7m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. To that end, you should be aware of the 1 warning sign we've spotted with Guizhou ChitianhuaLtd .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.