Is Goneo Group (SHSE:603195) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Goneo Group Co., Ltd. (SHSE:603195) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Goneo Group

What Is Goneo Group's Debt?

The image below, which you can click on for greater detail, shows that Goneo Group had debt of CN¥359.9m at the end of September 2024, a reduction from CN¥1.03b over a year. But it also has CN¥13.6b in cash to offset that, meaning it has CN¥13.3b net cash.

A Look At Goneo Group's Liabilities

The latest balance sheet data shows that Goneo Group had liabilities of CN¥4.21b due within a year, and liabilities of CN¥255.7m falling due after that. On the other hand, it had cash of CN¥13.6b and CN¥325.4m worth of receivables due within a year. 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. Simply put, the fact that Goneo Group has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Goneo Group grew its EBIT by 10% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Goneo Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Goneo Group recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually 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. And it impressed us with free cash flow of CN¥2.9b, being 82% of its EBIT. So is Goneo Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Goneo Group has 2 warning signs (and 1 which is concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.