We Think Country Garden Services Holdings (HKG:6098) Can Manage Its Debt With Ease

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.' 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 Country Garden Services Holdings Company Limited (HKG:6098) makes use of debt. But is this debt a concern to shareholders?

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 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 Country Garden Services Holdings

What Is Country Garden Services Holdings's Debt?

As you can see below, at the end of December 2020, Country Garden Services Holdings had CN¥3.81b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥18.0b in cash, leading to a CN¥14.2b net cash position.

A Look At Country Garden Services Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Country Garden Services Holdings had liabilities of CN¥14.2b due within 12 months and liabilities of CN¥812.0m due beyond that. On the other hand, it had cash of CN¥18.0b and CN¥4.46b worth of receivables due within a year. So it can boast CN¥7.40b 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 82% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Country Garden Services Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Country Garden Services Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Country Garden Services Holdings has CN¥14.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in CN¥3.3b. So is Country Garden Services Holdings's debt a risk? It doesn't seem so to us. 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. Be aware that Country Garden Services Holdings is showing 3 warning signs in our investment analysis , you should know about...

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. 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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