Is Guangxi Yuegui Guangye Holdings (SZSE:000833) Using Too Much Debt?

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.' 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. We can see that Guangxi Yuegui Guangye Holdings Co., Ltd. (SZSE:000833) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Guangxi Yuegui Guangye Holdings

What Is Guangxi Yuegui Guangye Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Guangxi Yuegui Guangye Holdings had debt of CN¥1.39b, up from CN¥1.23b in one year. But it also has CN¥1.51b in cash to offset that, meaning it has CN¥119.9m net cash.

How Strong Is Guangxi Yuegui Guangye Holdings' Balance Sheet?

According to the last reported balance sheet, Guangxi Yuegui Guangye Holdings had liabilities of CN¥1.72b due within 12 months, and liabilities of CN¥407.7m due beyond 12 months. On the other hand, it had cash of CN¥1.51b and CN¥321.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥298.1m.

Given Guangxi Yuegui Guangye Holdings has a market capitalization of CN¥4.62b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Guangxi Yuegui Guangye Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Guangxi Yuegui Guangye Holdings grew its EBIT by 107% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangxi Yuegui Guangye Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Guangxi Yuegui Guangye Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Guangxi Yuegui Guangye Holdings's free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Guangxi Yuegui Guangye Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥119.9m. And we liked the look of last year's 107% year-on-year EBIT growth. So we don't think Guangxi Yuegui Guangye Holdings's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Guangxi Yuegui Guangye Holdings you should know about.

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.