Would Shanghai GuijiuLtd (SHSE:600696) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Shanghai Guijiu Co.,Ltd (SHSE:600696) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 Shanghai GuijiuLtd

What Is Shanghai GuijiuLtd's Debt?

The image below, which you can click on for greater detail, shows that Shanghai GuijiuLtd had debt of CN¥289.7m at the end of September 2024, a reduction from CN¥601.0m over a year. However, it does have CN¥24.0m in cash offsetting this, leading to net debt of about CN¥265.7m.

How Healthy Is Shanghai GuijiuLtd's Balance Sheet?

According to the last reported balance sheet, Shanghai GuijiuLtd had liabilities of CN¥1.31b due within 12 months, and liabilities of CN¥15.7m due beyond 12 months. Offsetting this, it had CN¥24.0m in cash and CN¥8.38m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.29b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shanghai GuijiuLtd is worth CN¥3.91b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shanghai GuijiuLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shanghai GuijiuLtd made a loss at the EBIT level, and saw its revenue drop to CN¥506m, which is a fall of 69%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Shanghai GuijiuLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥87m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥136m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For example, we've discovered 2 warning signs for Shanghai GuijiuLtd that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.