These 4 Measures Indicate That Golden Resources Development International (HKG:677) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Golden Resources Development International Limited (HKG:677) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Golden Resources Development International

How Much Debt Does Golden Resources Development International Carry?

As you can see below, at the end of September 2022, Golden Resources Development International had HK$39.2m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has HK$712.9m in cash, leading to a HK$673.7m net cash position.

How Strong Is Golden Resources Development International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Golden Resources Development International had liabilities of HK$455.5m due within 12 months and liabilities of HK$255.2m due beyond that. Offsetting this, it had HK$712.9m in cash and HK$166.2m in receivables that were due within 12 months. So it actually has HK$168.4m more liquid assets than total liabilities.

This surplus suggests that Golden Resources Development International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Golden Resources Development International has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Golden Resources Development International's EBIT launched higher than Elon Musk, gaining a whopping 384% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Golden Resources Development International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Golden Resources Development International 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. Happily for any shareholders, Golden Resources Development International actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Golden Resources Development International has net cash of HK$673.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$156m, being 254% of its EBIT. So is Golden Resources Development International'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Golden Resources Development International (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.