Guangxi Wuzhou Zhongheng GroupLtd (SHSE:600252) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Guangxi Wuzhou Zhongheng Group Co.,Ltd (SHSE:600252) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. 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 Wuzhou Zhongheng GroupLtd

How Much Debt Does Guangxi Wuzhou Zhongheng GroupLtd Carry?

The image below, which you can click on for greater detail, shows that Guangxi Wuzhou Zhongheng GroupLtd had debt of CN¥1.83b at the end of September 2023, a reduction from CN¥2.14b over a year. However, its balance sheet shows it holds CN¥4.37b in cash, so it actually has CN¥2.55b net cash.

How Strong Is Guangxi Wuzhou Zhongheng GroupLtd's Balance Sheet?

The latest balance sheet data shows that Guangxi Wuzhou Zhongheng GroupLtd had liabilities of CN¥2.37b due within a year, and liabilities of CN¥994.9m falling due after that. Offsetting these obligations, it had cash of CN¥4.37b as well as receivables valued at CN¥1.61b due within 12 months. So it actually has CN¥2.62b more liquid assets than total liabilities.

This surplus liquidity suggests that Guangxi Wuzhou Zhongheng GroupLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Guangxi Wuzhou Zhongheng GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Guangxi Wuzhou Zhongheng GroupLtd 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, Guangxi Wuzhou Zhongheng GroupLtd reported revenue of CN¥3.0b, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Guangxi Wuzhou Zhongheng GroupLtd?

Although Guangxi Wuzhou Zhongheng GroupLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥54m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We think its revenue growth of 25% is a good sign. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Guangxi Wuzhou Zhongheng GroupLtd you should be aware of, and 1 of them shouldn't be ignored.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.