These 4 Measures Indicate That Guangzhou Haige Communications Group (SZSE:002465) Is Using Debt Reasonably Well

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.' 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. Importantly, Guangzhou Haige Communications Group Incorporated Company (SZSE:002465) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Guangzhou Haige Communications Group

How Much Debt Does Guangzhou Haige Communications Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Guangzhou Haige Communications Group had CN¥3.17b of debt, an increase on CN¥1.21b, over one year. However, it does have CN¥5.18b in cash offsetting this, leading to net cash of CN¥2.00b.

A Look At Guangzhou Haige Communications Group's Liabilities

We can see from the most recent balance sheet that Guangzhou Haige Communications Group had liabilities of CN¥6.07b falling due within a year, and liabilities of CN¥1.53b due beyond that. On the other hand, it had cash of CN¥5.18b and CN¥7.62b worth of receivables due within a year. So it can boast CN¥5.20b more liquid assets than total liabilities.

It's good to see that Guangzhou Haige Communications Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Guangzhou Haige Communications Group has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Guangzhou Haige Communications Group if management cannot prevent a repeat of the 41% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Guangzhou Haige Communications Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Guangzhou Haige Communications Group 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 three years, Guangzhou Haige Communications Group 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 we empathize with investors who find debt concerning, you should keep in mind that Guangzhou Haige Communications Group has net cash of CN¥2.00b, as well as more liquid assets than liabilities. So we are not troubled with Guangzhou Haige Communications Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Guangzhou Haige Communications Group .

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.