Is Guangzhou Sie Consulting (SZSE:300687) Using Too Much Debt?

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.' 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, Guangzhou Sie Consulting Co., Ltd. (SZSE:300687) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangzhou Sie Consulting

What Is Guangzhou Sie Consulting's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Guangzhou Sie Consulting had debt of CN¥428.7m, up from CN¥295.7m in one year. However, it also had CN¥416.9m in cash, and so its net debt is CN¥11.8m.

A Look At Guangzhou Sie Consulting's Liabilities

The latest balance sheet data shows that Guangzhou Sie Consulting had liabilities of CN¥529.5m due within a year, and liabilities of CN¥306.7m falling due after that. Offsetting this, it had CN¥416.9m in cash and CN¥1.13b in receivables that were due within 12 months. So it can boast CN¥713.7m more liquid assets than total liabilities.

This surplus suggests that Guangzhou Sie Consulting has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Guangzhou Sie Consulting has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With debt at a measly 0.072 times EBITDA and EBIT covering interest a whopping 118 times, it's clear that Guangzhou Sie Consulting is not a desperate borrower. So relative to past earnings, the debt load seems trivial. In fact Guangzhou Sie Consulting's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangzhou Sie Consulting's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Guangzhou Sie Consulting burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

We feel some trepidation about Guangzhou Sie Consulting's difficulty EBIT growth rate, but we've got positives to focus on, too. To wit both its interest cover and net debt to EBITDA were encouraging signs. Looking at all the angles mentioned above, it does seem to us that Guangzhou Sie Consulting is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Guangzhou Sie Consulting has 3 warning signs we think you should be aware of.

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.