GDH Supertime Group (SZSE:001338) Has A Rock Solid Balance Sheet

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 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. Importantly, GDH Supertime Group Company Limited (SZSE:001338) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GDH Supertime Group

What Is GDH Supertime Group's Net Debt?

The image below, which you can click on for greater detail, shows that GDH Supertime Group had debt of CN¥525.8m at the end of June 2024, a reduction from CN¥807.2m over a year. However, its balance sheet shows it holds CN¥954.3m in cash, so it actually has CN¥428.5m net cash.

How Healthy Is GDH Supertime Group's Balance Sheet?

We can see from the most recent balance sheet that GDH Supertime Group had liabilities of CN¥1.10b falling due within a year, and liabilities of CN¥9.60m due beyond that. Offsetting this, it had CN¥954.3m in cash and CN¥1.10b in receivables that were due within 12 months. So it can boast CN¥937.3m more liquid assets than total liabilities.

It's good to see that GDH Supertime Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, GDH Supertime Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that GDH Supertime Group has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is GDH Supertime Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While GDH Supertime 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, GDH Supertime Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case GDH Supertime Group has CN¥428.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.9b, being 973% of its EBIT. When it comes to GDH Supertime Group's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. To that end, you should be aware of the 1 warning sign we've spotted with GDH Supertime Group .

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.

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.