These 4 Measures Indicate That Guoquan Food (Shanghai) (HKG:2517) Is Using Debt Reasonably Well

Warren Buffett famously said, '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 note that Guoquan Food (Shanghai) Co., Ltd. (HKG:2517) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Guoquan Food (Shanghai)

What Is Guoquan Food (Shanghai)'s Debt?

The image below, which you can click on for greater detail, shows that Guoquan Food (Shanghai) had debt of CN¥80.3m at the end of December 2023, a reduction from CN¥95.6m over a year. However, its balance sheet shows it holds CN¥1.63b in cash, so it actually has CN¥1.55b net cash.

How Strong Is Guoquan Food (Shanghai)'s Balance Sheet?

We can see from the most recent balance sheet that Guoquan Food (Shanghai) had liabilities of CN¥1.17b falling due within a year, and liabilities of CN¥105.0m due beyond that. On the other hand, it had cash of CN¥1.63b and CN¥54.3m worth of receivables due within a year. So it can boast CN¥410.0m more liquid assets than total liabilities.

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

Also positive, Guoquan Food (Shanghai) grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Guoquan Food (Shanghai) will need earnings to service that debt. 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 company can only pay off debt with cold hard cash, not accounting profits. While Guoquan Food (Shanghai) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Guoquan Food (Shanghai) recorded free cash flow of 30% of its EBIT, which is weaker 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 Guoquan Food (Shanghai) has CN¥1.55b in net cash and a decent-looking balance sheet. And we liked the look of last year's 26% year-on-year EBIT growth. So is Guoquan Food (Shanghai)'s debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Guoquan Food (Shanghai), you may well want to click here to check an interactive graph of its earnings per share history.

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.