We Think Guanze Medical Information Industry (Holding) (HKG:2427) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Guanze Medical Information Industry (Holding) Co., Ltd. (HKG:2427) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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¥18.5m at the end of June 2024, a reduction from CN¥30.8m over a year. However, it does have CN¥49.6m in cash offsetting this, leading to net cash of CN¥31.1m.

A Look At Guanze Medical Information Industry (Holding)'s Liabilities

The latest balance sheet data shows that Guanze Medical Information Industry (Holding) had liabilities of CN¥34.3m due within a year, and liabilities of CN¥278.0k falling due after that. On the other hand, it had cash of CN¥49.6m and CN¥99.0m worth of receivables due within a year. So it can boast CN¥114.0m more liquid assets than total liabilities.

This surplus suggests that Guanze Medical Information Industry (Holding) is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Guanze Medical Information Industry (Holding) has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Guanze Medical Information Industry (Holding) if management cannot prevent a repeat of the 57% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guanze Medical Information Industry (Holding)'s earnings that will influence how the balance sheet holds up in the future. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Guanze Medical Information Industry (Holding) 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. Over the last three years, Guanze Medical Information Industry (Holding) recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guanze Medical Information Industry (Holding) has CN¥31.1m in net cash and a decent-looking balance sheet. So we are not troubled with Guanze Medical Information Industry (Holding)'s debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Guanze Medical Information Industry (Holding) you should be aware of, and 2 of them can't be ignored.

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.