Does Guangdong Meiyanjixiang HydropowerLtd (SHSE:600868) Have A Healthy Balance Sheet?

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 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. We can see that Guangdong Meiyanjixiang Hydropower Co.,Ltd. (SHSE:600868) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Guangdong Meiyanjixiang HydropowerLtd

How Much Debt Does Guangdong Meiyanjixiang HydropowerLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Guangdong Meiyanjixiang HydropowerLtd had CN¥99.1m of debt in September 2024, down from CN¥133.0m, one year before. However, it does have CN¥551.0m in cash offsetting this, leading to net cash of CN¥451.8m.

A Look At Guangdong Meiyanjixiang HydropowerLtd's Liabilities

The latest balance sheet data shows that Guangdong Meiyanjixiang HydropowerLtd had liabilities of CN¥293.0m due within a year, and liabilities of CN¥389.8m falling due after that. Offsetting this, it had CN¥551.0m in cash and CN¥434.6m in receivables that were due within 12 months. So it can boast CN¥302.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Guangdong Meiyanjixiang HydropowerLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Guangdong Meiyanjixiang HydropowerLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Guangdong Meiyanjixiang HydropowerLtd'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.

In the last year Guangdong Meiyanjixiang HydropowerLtd had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to CN¥330m. We would much prefer see growth.

So How Risky Is Guangdong Meiyanjixiang HydropowerLtd?

While Guangdong Meiyanjixiang HydropowerLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥77m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Guangdong Meiyanjixiang HydropowerLtd (of which 1 doesn't sit too well with us!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.