We Think Greentown Service Group (HKG:2869) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Greentown Service Group Co. Ltd. (HKG:2869) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Greentown Service Group

How Much Debt Does Greentown Service Group Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Greentown Service Group had debt of CN¥343.6m, up from CN¥281.6m in one year. However, its balance sheet shows it holds CN¥4.72b in cash, so it actually has CN¥4.37b net cash.

How Strong Is Greentown Service Group's Balance Sheet?

We can see from the most recent balance sheet that Greentown Service Group had liabilities of CN¥9.07b falling due within a year, and liabilities of CN¥1.24b due beyond that. Offsetting these obligations, it had cash of CN¥4.72b as well as receivables valued at CN¥5.59b 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 it's very unlikely that the CN¥10.6b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Greentown Service Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Greentown Service Group grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Greentown Service Group recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Greentown Service Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.37b. And we liked the look of last year's 22% year-on-year EBIT growth. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Greentown Service Group has 1 warning sign 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.