Gushengtang Holdings (HKG:2273) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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. As with many other companies Gushengtang Holdings Limited (HKG:2273) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is Gushengtang Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Gushengtang Holdings had debt of CN¥100.1m, up from CN¥16.4m in one year. However, it does have CN¥1.14b in cash offsetting this, leading to net cash of CN¥1.04b.

How Strong Is Gushengtang Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gushengtang Holdings had liabilities of CN¥763.3m due within 12 months and liabilities of CN¥516.5m due beyond that. Offsetting this, it had CN¥1.14b in cash and CN¥269.4m in receivables that were due within 12 months. So it can boast CN¥129.7m more liquid assets than total liabilities.

Having regard to Gushengtang Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥8.03b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Gushengtang Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Gushengtang Holdings

In addition to that, we're happy to report that Gushengtang Holdings has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 Gushengtang Holdings 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. Gushengtang Holdings 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. Happily for any shareholders, Gushengtang Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gushengtang Holdings has CN¥1.04b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in CN¥362m. So we don't think Gushengtang Holdings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Gushengtang Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.