These 4 Measures Indicate That Country Garden Services Holdings (HKG:6098) Is Using Debt Safely

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. As with many other companies Country Garden Services Holdings Company Limited (HKG:6098) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Country Garden Services Holdings

What Is Country Garden Services Holdings's Debt?

As you can see below, at the end of June 2021, Country Garden Services Holdings had CN¥4.73b of debt, up from CN¥3.39b a year ago. Click the image for more detail. But it also has CN¥25.1b in cash to offset that, meaning it has CN¥20.3b net cash.

How Strong Is Country Garden Services Holdings' Balance Sheet?

The latest balance sheet data shows that Country Garden Services Holdings had liabilities of CN¥18.7b due within a year, and liabilities of CN¥2.38b falling due after that. Offsetting these obligations, it had cash of CN¥25.1b as well as receivables valued at CN¥8.00b due within 12 months. So it actually has CN¥12.0b more liquid assets than total liabilities.

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

On top of that, Country Garden Services Holdings grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Country Garden Services Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Country Garden Services Holdings 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. During the last three years, Country Garden Services Holdings generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Country Garden Services Holdings has net cash of CN¥20.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in CN¥3.3b. So we don't think Country Garden Services Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Country Garden Services Holdings has 3 warning signs we think you should be aware of.

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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