China Golden Classic Group (HKG:8281) Has A Rock Solid Balance Sheet

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 China Golden Classic Group Limited (HKG:8281) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Golden Classic Group

How Much Debt Does China Golden Classic Group Carry?

You can click the graphic below for the historical numbers, but it shows that China Golden Classic Group had CN¥20.0m of debt in December 2020, down from CN¥60.0m, one year before. But it also has CN¥87.1m in cash to offset that, meaning it has CN¥67.1m net cash.

How Healthy Is China Golden Classic Group's Balance Sheet?

According to the last reported balance sheet, China Golden Classic Group had liabilities of CN¥122.2m due within 12 months, and liabilities of CN¥1.38m due beyond 12 months. On the other hand, it had cash of CN¥87.1m and CN¥43.4m worth of receivables due within a year. So it can boast CN¥6.91m more liquid assets than total liabilities.

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

Better yet, China Golden Classic Group grew its EBIT by 111% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Golden Classic Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Golden Classic Group 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. In the last three years, China Golden Classic Group's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that China Golden Classic Group has net cash of CN¥67.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 111% year-on-year EBIT growth. So we don't think China Golden Classic Group's use of debt is risky. 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 3 warning signs for China Golden Classic Group (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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