Guanze Medical Information Industry (Holding) (HKG:2427) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Guanze Medical Information Industry (Holding) Co., Ltd. (HKG:2427) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Guanze Medical Information Industry (Holding)

What Is Guanze Medical Information Industry (Holding)'s Debt?

The image below, which you can click on for greater detail, shows that Guanze Medical Information Industry (Holding) had debt of CN¥21.1m at the end of December 2023, a reduction from CN¥26.9m over a year. However, it does have CN¥68.4m in cash offsetting this, leading to net cash of CN¥47.3m.

How Strong Is Guanze Medical Information Industry (Holding)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guanze Medical Information Industry (Holding) had liabilities of CN¥41.8m due within 12 months and liabilities of CN¥392.0k due beyond that. Offsetting this, it had CN¥68.4m in cash and CN¥126.0m in receivables that were due within 12 months. So it actually has CN¥152.2m more liquid assets than total liabilities.

It's good to see that Guanze Medical Information Industry (Holding) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Guanze Medical Information Industry (Holding) boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Guanze Medical Information Industry (Holding)'s EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guanze Medical Information Industry (Holding)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Guanze Medical Information Industry (Holding) 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. Considering the last three years, Guanze Medical Information Industry (Holding) actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guanze Medical Information Industry (Holding) has CN¥47.3m in net cash and a decent-looking balance sheet. So we are not troubled with Guanze Medical Information Industry (Holding)'s debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Guanze Medical Information Industry (Holding) has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.