Goneo Group (SHSE:603195) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Goneo Group Co., Ltd. (SHSE:603195) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Goneo Group

What Is Goneo Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Goneo Group had CN¥359.9m of debt in September 2024, down from CN¥1.03b, one year before. However, its balance sheet shows it holds CN¥13.6b in cash, so it actually has CN¥13.3b net cash.

How Healthy Is Goneo Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Goneo Group had liabilities of CN¥4.21b due within 12 months and liabilities of CN¥255.7m due beyond that. Offsetting this, it had CN¥13.6b in cash and CN¥325.4m in receivables that were due within 12 months. So it actually has CN¥9.48b more liquid assets than total liabilities.

This surplus suggests that Goneo Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Goneo Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Goneo Group grew its EBIT by 10% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Goneo Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Goneo Group 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, Goneo Group generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Goneo Group has net cash of CN¥13.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥2.9b. So is Goneo Group's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Goneo Group (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.