Is Guangzhou Grandbuy (SZSE:002187) Using Too Much 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.' 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 Guangzhou Grandbuy Co., Ltd. (SZSE:002187) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. 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.

Check out our latest analysis for Guangzhou Grandbuy

What Is Guangzhou Grandbuy's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Guangzhou Grandbuy had debt of CN¥1.89b, up from CN¥500.4m in one year. But on the other hand it also has CN¥3.04b in cash, leading to a CN¥1.15b net cash position.

How Strong Is Guangzhou Grandbuy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangzhou Grandbuy had liabilities of CN¥3.00b due within 12 months and liabilities of CN¥2.29b due beyond that. Offsetting this, it had CN¥3.04b in cash and CN¥172.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.08b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Guangzhou Grandbuy is worth CN¥5.53b, 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. Despite its noteworthy liabilities, Guangzhou Grandbuy boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Guangzhou Grandbuy made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥69m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangzhou Grandbuy 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Guangzhou Grandbuy may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Guangzhou Grandbuy saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Guangzhou Grandbuy does have more liabilities than liquid assets, it also has net cash of CN¥1.15b. So while Guangzhou Grandbuy does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Guangzhou Grandbuy .

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.