Health Check: How Prudently Does Guangxi Wuzhou Zhongheng GroupLtd (SHSE:600252) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Guangxi Wuzhou Zhongheng Group Co.,Ltd (SHSE:600252) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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?

As you can see below, Guangxi Wuzhou Zhongheng GroupLtd had CN¥1.74b of debt at September 2024, down from CN¥1.83b a year prior. But it also has CN¥4.12b in cash to offset that, meaning it has CN¥2.37b net cash.

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

Zooming in on the latest balance sheet data, we can see that Guangxi Wuzhou Zhongheng GroupLtd had liabilities of CN¥2.36b due within 12 months and liabilities of CN¥853.5m due beyond that. On the other hand, it had cash of CN¥4.12b and CN¥1.42b worth of receivables due within a year. So it actually has CN¥2.32b more liquid assets than total liabilities.

It's good to see that Guangxi Wuzhou Zhongheng GroupLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 it is Guangxi Wuzhou Zhongheng GroupLtd'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.

Over 12 months, Guangxi Wuzhou Zhongheng GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.9b, which is a fall of 4.4%. We would much prefer see growth.

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 generated positive free cash flow of CN¥299m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 - Guangxi Wuzhou Zhongheng GroupLtd has 1 warning sign we think you should be aware of.

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.