Is CoCreation Grass (SHSE:605099) A Risky Investment?

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 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. Importantly, CoCreation Grass Co., Ltd (SHSE:605099) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 CoCreation Grass

What Is CoCreation Grass's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 CoCreation Grass had CN¥100.0m of debt, an increase on CN¥50.0m, over one year. But on the other hand it also has CN¥748.8m in cash, leading to a CN¥648.8m net cash position.

How Strong Is CoCreation Grass' Balance Sheet?

We can see from the most recent balance sheet that CoCreation Grass had liabilities of CN¥399.9m falling due within a year, and liabilities of CN¥28.3m due beyond that. On the other hand, it had cash of CN¥748.8m and CN¥732.0m worth of receivables due within a year. So it can boast CN¥1.05b more liquid assets than total liabilities.

This short term liquidity is a sign that CoCreation Grass could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CoCreation Grass boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that CoCreation Grass grew its EBIT by 12% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CoCreation Grass 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 most recent three years, CoCreation Grass recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CoCreation Grass has net cash of CN¥648.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥336m, being 70% of its EBIT. So is CoCreation Grass's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for CoCreation Grass that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.