Does Guangdong Goworld (SZSE:000823) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Guangdong Goworld Co., Ltd. (SZSE:000823) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Guangdong Goworld

What Is Guangdong Goworld's Debt?

The chart below, which you can click on for greater detail, shows that Guangdong Goworld had CN¥1.65b in debt in March 2024; about the same as the year before. But it also has CN¥1.97b in cash to offset that, meaning it has CN¥325.2m net cash.

How Strong Is Guangdong Goworld's Balance Sheet?

According to the last reported balance sheet, Guangdong Goworld had liabilities of CN¥1.75b due within 12 months, and liabilities of CN¥1.26b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.97b as well as receivables valued at CN¥1.63b due within 12 months. So it can boast CN¥585.4m more liquid assets than total liabilities.

This surplus suggests that Guangdong Goworld has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangdong Goworld has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Guangdong Goworld's saving grace is its low debt levels, because its EBIT has tanked 40% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangdong Goworld'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Guangdong Goworld 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. In the last three years, Guangdong Goworld's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Goworld has CN¥325.2m in net cash and a decent-looking balance sheet. So we are not troubled with Guangdong Goworld's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Guangdong Goworld has 3 warning signs (and 1 which is a bit unpleasant) we think 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.

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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.

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