Goldcard Smart Group (SZSE:300349) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Goldcard Smart Group Co., Ltd. (SZSE:300349) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Goldcard Smart Group

What Is Goldcard Smart Group's Net Debt?

As you can see below, at the end of March 2024, Goldcard Smart Group had CN¥746.7m of debt, up from CN¥350.9m a year ago. Click the image for more detail. However, it does have CN¥1.54b in cash offsetting this, leading to net cash of CN¥789.6m.

How Strong Is Goldcard Smart Group's Balance Sheet?

We can see from the most recent balance sheet that Goldcard Smart Group had liabilities of CN¥2.01b falling due within a year, and liabilities of CN¥529.8m due beyond that. Offsetting this, it had CN¥1.54b in cash and CN¥2.00b in receivables that were due within 12 months. So it actually has CN¥1.00b more liquid assets than total liabilities.

This surplus suggests that Goldcard Smart Group is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Goldcard Smart 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 Goldcard Smart Group has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. 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 Goldcard Smart Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Goldcard Smart 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. Considering the last three years, Goldcard Smart Group actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Goldcard Smart Group has net cash of CN¥789.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 34% year-on-year EBIT growth. So is Goldcard Smart Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Goldcard Smart Group you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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