Does Guanhao BiotechLtd (SZSE:300238) Have A Healthy Balance Sheet?

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.' 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 Guanhao Biotech Co.,Ltd. (SZSE:300238) does use debt in its business. But should shareholders be worried about its use of debt?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Guanhao BiotechLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Guanhao BiotechLtd had debt of CN¥84.1m, up from CN¥25.5m in one year. However, it does have CN¥106.6m in cash offsetting this, leading to net cash of CN¥22.6m.

How Healthy Is Guanhao BiotechLtd's Balance Sheet?

We can see from the most recent balance sheet that Guanhao BiotechLtd had liabilities of CN¥164.3m falling due within a year, and liabilities of CN¥95.0m due beyond that. Offsetting these obligations, it had cash of CN¥106.6m as well as receivables valued at CN¥70.0m due within 12 months. So its liabilities total CN¥82.6m more than the combination of its cash and short-term receivables.

Of course, Guanhao BiotechLtd has a market capitalization of CN¥3.92b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Guanhao BiotechLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Guanhao BiotechLtd

Although Guanhao BiotechLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥9.4m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guanhao BiotechLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Guanhao BiotechLtd 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 last year, Guanhao BiotechLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Guanhao BiotechLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥22.6m. So we don't have any problem with Guanhao BiotechLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Guanhao BiotechLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.