Guangdong Rongtai IndustryLtd (SHSE:600589) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Guangdong Rongtai Industry Co.,Ltd (SHSE:600589) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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?

As you can see below, Guangdong Rongtai IndustryLtd had CN¥276.8m of debt at March 2024, down from CN¥1.40b a year prior. But on the other hand it also has CN¥437.2m in cash, leading to a CN¥160.4m net cash position.

How Strong Is Guangdong Rongtai IndustryLtd's Balance Sheet?

According to the last reported balance sheet, Guangdong Rongtai IndustryLtd had liabilities of CN¥317.8m due within 12 months, and liabilities of CN¥285.3m due beyond 12 months. On the other hand, it had cash of CN¥437.2m and CN¥87.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥78.9m.

Since publicly traded Guangdong Rongtai IndustryLtd shares are worth a total of CN¥3.59b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Guangdong Rongtai IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to CN¥375m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Guangdong Rongtai IndustryLtd?

While Guangdong Rongtai IndustryLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥128m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For instance, we've identified 2 warning signs for Guangdong Rongtai IndustryLtd (1 makes us a bit uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.