Does Guangdong Rongtai IndustryLtd (SHSE:600589) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Guangdong Rongtai Industry Co.,Ltd (SHSE:600589) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Guangdong Rongtai IndustryLtd

What Is Guangdong Rongtai IndustryLtd's Debt?

The image below, which you can click on for greater detail, shows that Guangdong Rongtai IndustryLtd had debt of CN¥276.9m at the end of December 2023, a reduction from CN¥1.40b over a year. But on the other hand it also has CN¥1.16b in cash, leading to a CN¥885.0m net cash position.

How Strong Is Guangdong Rongtai IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong Rongtai IndustryLtd had liabilities of CN¥1.04b due within a year, and liabilities of CN¥287.6m falling due after that. On the other hand, it had cash of CN¥1.16b and CN¥133.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥36.3m.

Having regard to Guangdong Rongtai IndustryLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.34b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Guangdong Rongtai IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Rongtai IndustryLtd 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 Rongtai IndustryLtd had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥367m. That's not what we would hope to see.

So How Risky Is Guangdong Rongtai IndustryLtd?

Although Guangdong Rongtai IndustryLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥83m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Guangdong Rongtai IndustryLtd is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.