Here's Why Goldcard Smart Group (SZSE:300349) Can Manage Its Debt Responsibly

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 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, Goldcard Smart Group Co., Ltd. (SZSE:300349) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Goldcard Smart Group

What Is Goldcard Smart Group's Net Debt?

As you can see below, Goldcard Smart Group had CN¥462.2m of debt at September 2024, down from CN¥663.6m a year prior. But it also has CN¥1.02b in cash to offset that, meaning it has CN¥558.1m net cash.

How Healthy Is Goldcard Smart Group's Balance Sheet?

The latest balance sheet data shows that Goldcard Smart Group had liabilities of CN¥1.98b due within a year, and liabilities of CN¥520.2m falling due after that. Offsetting this, it had CN¥1.02b in cash and CN¥2.25b in receivables that were due within 12 months. So it actually has CN¥771.4m more liquid assets than total liabilities.

This surplus suggests that Goldcard Smart Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Goldcard Smart Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Goldcard Smart Group has increased its EBIT by 4.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, Goldcard Smart Group reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

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¥558.1m, as well as more liquid assets than liabilities. And it also grew its EBIT by 4.9% over the last year. So we are not troubled with Goldcard Smart Group's debt use. 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. For example, we've discovered 1 warning sign for Goldcard Smart Group that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.