The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Gohigh Networks Co.,Ltd (SZSE:000851) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Gohigh NetworksLtd
What Is Gohigh NetworksLtd's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Gohigh NetworksLtd had CN¥1.49b of debt, an increase on CN¥1.38b, over one year. On the flip side, it has CN¥1.26b in cash leading to net debt of about CN¥222.7m.
How Strong Is Gohigh NetworksLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Gohigh NetworksLtd had liabilities of CN¥4.57b due within 12 months and liabilities of CN¥351.3m due beyond that. On the other hand, it had cash of CN¥1.26b and CN¥3.00b worth of receivables due within a year. So it has liabilities totalling CN¥649.3m more than its cash and near-term receivables, combined.
Given Gohigh NetworksLtd has a market capitalization of CN¥7.87b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gohigh NetworksLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Gohigh NetworksLtd made a loss at the EBIT level, and saw its revenue drop to CN¥6.6b, which is a fall of 18%. That's not what we would hope to see.
Caveat Emptor
Not only did Gohigh NetworksLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥53m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥180m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For example - Gohigh NetworksLtd has 2 warning signs we think you should be aware of.
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.