These 4 Measures Indicate That Guangxi Yuegui Guangye Holdings (SZSE:000833) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Guangxi Yuegui Guangye Holdings Co., Ltd. (SZSE:000833) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Guangxi Yuegui Guangye Holdings

How Much Debt Does Guangxi Yuegui Guangye Holdings Carry?

As you can see below, Guangxi Yuegui Guangye Holdings had CN¥1.23b of debt at September 2023, down from CN¥1.29b a year prior. But on the other hand it also has CN¥1.44b in cash, leading to a CN¥211.5m net cash position.

How Healthy Is Guangxi Yuegui Guangye Holdings' Balance Sheet?

According to the last reported balance sheet, Guangxi Yuegui Guangye Holdings had liabilities of CN¥1.49b due within 12 months, and liabilities of CN¥453.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.44b as well as receivables valued at CN¥251.2m due within 12 months. So its liabilities total CN¥252.9m more than the combination of its cash and short-term receivables.

Of course, Guangxi Yuegui Guangye Holdings has a market capitalization of CN¥3.90b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Shareholders should be aware that Guangxi Yuegui Guangye Holdings's EBIT was down 82% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Guangxi Yuegui Guangye Holdings recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Guangxi Yuegui Guangye Holdings has CN¥211.5m in net cash. So although we see some areas for improvement, we're not too worried about Guangxi Yuegui Guangye Holdings'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. To that end, you should be aware of the 3 warning signs we've spotted with Guangxi Yuegui Guangye Holdings .

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.