We Think Guangzhou Haige Communications Group (SZSE:002465) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Haige Communications Group Incorporated Company (SZSE:002465) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Guangzhou Haige Communications Group

How Much Debt Does Guangzhou Haige Communications Group Carry?

As you can see below, at the end of December 2023, Guangzhou Haige Communications Group had CN¥1.50b of debt, up from CN¥472.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥4.83b in cash, leading to a CN¥3.33b net cash position.

How Strong Is Guangzhou Haige Communications Group's Balance Sheet?

We can see from the most recent balance sheet that Guangzhou Haige Communications Group had liabilities of CN¥5.33b falling due within a year, and liabilities of CN¥615.0m due beyond that. Offsetting these obligations, it had cash of CN¥4.83b as well as receivables valued at CN¥6.63b due within 12 months. So it actually has CN¥5.52b more liquid assets than total liabilities.

This excess liquidity suggests that Guangzhou Haige Communications Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues 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.

But the other side of the story is that Guangzhou Haige Communications Group saw its EBIT decline by 9.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Guangzhou Haige Communications Group burned a lot of cash. 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¥3.33b, as well as more liquid assets than liabilities. So we don't have any problem with Guangzhou Haige Communications Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Guangzhou Haige Communications Group has 3 warning signs we think you should be aware of.

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.