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.' 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 CoCreation Grass Co., Ltd (SHSE:605099) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 CoCreation Grass
What Is CoCreation Grass's Net Debt?
The image below, which you can click on for greater detail, shows that CoCreation Grass had debt of CN„100.0m at the end of March 2024, a reduction from CN„200.0m over a year. But on the other hand it also has CN„993.3m in cash, leading to a CN„893.3m net cash position.
A Look At CoCreation Grass' Liabilities
The latest balance sheet data shows that CoCreation Grass had liabilities of CN„402.9m due within a year, and liabilities of CN„33.9m falling due after that. Offsetting this, it had CN„993.3m in cash and CN„601.6m in receivables that were due within 12 months. So it can boast CN„1.16b more liquid assets than total liabilities.
This surplus suggests that CoCreation Grass has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CoCreation Grass has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that CoCreation Grass has increased its EBIT by 7.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CoCreation Grass'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. CoCreation Grass 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 most recent three years, CoCreation Grass recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to investigate a company's debt, in this case CoCreation Grass has CN„893.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN„291m, being 66% of its EBIT. So we don't think CoCreation Grass's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with CoCreation Grass , 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.
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About SHSE:605099
Flawless balance sheet and fair value.
