These 4 Measures Indicate That Greentown Service Group (HKG:2869) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Greentown Service Group Co. Ltd. (HKG:2869) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Greentown Service Group

What Is Greentown Service Group's Net Debt?

The image below, which you can click on for greater detail, shows that Greentown Service Group had debt of CN¥313.5m at the end of December 2023, a reduction from CN¥333.6m over a year. But on the other hand it also has CN¥5.69b in cash, leading to a CN¥5.38b net cash position.

How Healthy Is Greentown Service Group's Balance Sheet?

The latest balance sheet data shows that Greentown Service Group had liabilities of CN¥8.56b due within a year, and liabilities of CN¥1.30b falling due after that. Offsetting this, it had CN¥5.69b in cash and CN¥4.35b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Greentown Service Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥9.75b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Greentown Service Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Greentown Service Group has been able to increase its EBIT by 27% in twelve months, making it easier to pay down 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 Greentown Service 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, a company can only pay off debt with cold hard cash, not accounting profits. Greentown Service 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. During the last three years, Greentown Service Group produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Greentown Service Group has CN¥5.38b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So is Greentown Service Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Greentown Service Group you should be aware of.

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. 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.