We Think Guangzhou Guanggang Gases & EnergyLtd (SHSE:688548) Is Taking Some Risk With Its 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Guangzhou Guanggang Gases & Energy Co.,Ltd. (SHSE:688548) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Guangzhou Guanggang Gases & EnergyLtd

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

As you can see below, Guangzhou Guanggang Gases & EnergyLtd had CN¥907.0m of debt at June 2024, down from CN¥1.08b a year prior. However, it does have CN¥1.93b in cash offsetting this, leading to net cash of CN¥1.02b.

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

The latest balance sheet data shows that Guangzhou Guanggang Gases & EnergyLtd had liabilities of CN¥1.20b due within a year, and liabilities of CN¥679.4m falling due after that. On the other hand, it had cash of CN¥1.93b and CN¥465.1m worth of receivables due within a year. So it actually has CN¥516.2m more liquid assets than total liabilities.

This surplus suggests that Guangzhou Guanggang Gases & EnergyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 33% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Guanggang Gases & EnergyLtd'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, 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¥1.02b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Guangzhou Guanggang Gases & EnergyLtd's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Guangzhou Guanggang Gases & EnergyLtd (1 is concerning!) that you should be aware of before investing here.

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.