Guming Holdings (HKG:1364) Could Easily Take On More Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Guming Holdings Limited (HKG:1364) does carry debt. But should shareholders be worried about its use of debt?

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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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Guming Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Guming Holdings had CN¥1.67b of debt in June 2025, down from CN¥3.29b, one year before. But it also has CN¥5.13b in cash to offset that, meaning it has CN¥3.46b net cash.

A Look At Guming Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Guming Holdings had liabilities of CN¥3.95b due within 12 months and liabilities of CN¥359.6m due beyond that. Offsetting these obligations, it had cash of CN¥5.13b as well as receivables valued at CN¥533.5m due within 12 months. So it actually has CN¥1.35b more liquid assets than total liabilities.

This short term liquidity is a sign that Guming Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guming Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Guming Holdings

Another good sign is that Guming Holdings has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Guming Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guming Holdings 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. During the last three years, Guming Holdings produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guming Holdings has CN¥3.46b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 26% over the last year. So we don't think Guming Holdings's use of debt is risky. 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. Be aware that Guming Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.