Would Guangdong Orient Zirconic Ind Sci & TechLtd (SZSE:002167) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Guangdong Orient Zirconic Ind Sci & Tech Co.,Ltd (SZSE:002167) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Guangdong Orient Zirconic Ind Sci & TechLtd

What Is Guangdong Orient Zirconic Ind Sci & TechLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guangdong Orient Zirconic Ind Sci & TechLtd had CN¥839.3m of debt, an increase on CN¥760.8m, over one year. However, it also had CN¥475.3m in cash, and so its net debt is CN¥364.0m.

How Strong Is Guangdong Orient Zirconic Ind Sci & TechLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong Orient Zirconic Ind Sci & TechLtd had liabilities of CN¥1.80b due within a year, and liabilities of CN¥228.1m falling due after that. On the other hand, it had cash of CN¥475.3m and CN¥374.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.18b.

This deficit isn't so bad because Guangdong Orient Zirconic Ind Sci & TechLtd is worth CN¥4.01b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Guangdong Orient Zirconic Ind Sci & TechLtd will need earnings to service that debt. 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.

Over 12 months, Guangdong Orient Zirconic Ind Sci & TechLtd reported revenue of CN¥1.5b, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Guangdong Orient Zirconic Ind Sci & TechLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥102m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥111m of cash over the last year. So to be blunt we think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Guangdong Orient Zirconic Ind Sci & TechLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.

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