Guangdong Goworld (SZSE:000823) Has A Pretty 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 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. We can see that Guangdong Goworld Co., Ltd. (SZSE:000823) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Guangdong Goworld

How Much Debt Does Guangdong Goworld Carry?

As you can see below, Guangdong Goworld had CN¥1.49b of debt at September 2024, down from CN¥1.69b a year prior. But it also has CN¥1.81b in cash to offset that, meaning it has CN¥320.0m net cash.

How Healthy Is Guangdong Goworld's Balance Sheet?

We can see from the most recent balance sheet that Guangdong Goworld had liabilities of CN¥1.86b falling due within a year, and liabilities of CN¥1.20b due beyond that. Offsetting this, it had CN¥1.81b in cash and CN¥1.88b in receivables that were due within 12 months. So it can boast CN¥630.3m 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.

On the other hand, Guangdong Goworld's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong Goworld's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the most recent three years, Guangdong Goworld recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangdong Goworld has CN¥320.0m in net cash and a decent-looking balance sheet. So we are not troubled with Guangdong Goworld's debt use. 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. For example, we've discovered 2 warning signs for Guangdong Goworld (1 makes us a bit uncomfortable!) 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.