Does Guangzhou Guanggang Gases & EnergyLtd (SHSE:688548) 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. Importantly, Guangzhou Guanggang Gases & Energy Co.,Ltd. (SHSE:688548) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangzhou Guanggang Gases & EnergyLtd

What Is Guangzhou Guanggang Gases & EnergyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangzhou Guanggang Gases & EnergyLtd had CN¥1.16b of debt, an increase on CN¥775.6m, over one year. But it also has CN¥1.82b in cash to offset that, meaning it has CN¥662.8m net cash.

How Strong Is Guangzhou Guanggang Gases & EnergyLtd's Balance Sheet?

According to the last reported balance sheet, Guangzhou Guanggang Gases & EnergyLtd had liabilities of CN¥1.31b due within 12 months, and liabilities of CN¥796.9m due beyond 12 months. Offsetting this, it had CN¥1.82b in cash and CN¥458.1m in receivables that were due within 12 months. So it can boast CN¥172.8m more liquid assets than total liabilities.

Having regard to Guangzhou Guanggang Gases & EnergyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥13.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Guangzhou Guanggang Gases & EnergyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Guangzhou Guanggang Gases & EnergyLtd if management cannot prevent a repeat of the 23% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guangzhou Guanggang Gases & EnergyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Guangzhou Guanggang Gases & EnergyLtd 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 Guanggang Gases & EnergyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangzhou Guanggang Gases & EnergyLtd has net cash of CN¥662.8m, as well as more liquid assets than liabilities. So while Guangzhou Guanggang Gases & EnergyLtd does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 2 warning signs for Guangzhou Guanggang Gases & EnergyLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.