Does Country Garden Services Holdings (HKG:6098) Have A Healthy Balance Sheet?

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.' 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. We note that Country Garden Services Holdings Company Limited (HKG:6098) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Country Garden Services Holdings

What Is Country Garden Services Holdings's Net Debt?

As you can see below, Country Garden Services Holdings had CN¥1.85b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥14.1b in cash offsetting this, leading to net cash of CN¥12.3b.

How Strong Is Country Garden Services Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Country Garden Services Holdings had liabilities of CN¥27.0b due within 12 months and liabilities of CN¥5.18b due beyond that. Offsetting this, it had CN¥14.1b in cash and CN¥21.0b in receivables that were due within 12 months. So it actually has CN¥2.92b more liquid assets than total liabilities.

This surplus suggests that Country Garden Services Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Country Garden Services Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Country Garden Services Holdings's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Country Garden Services Holdings can strengthen its balance sheet over time. 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. While Country Garden Services Holdings 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. During the last three years, Country Garden Services Holdings produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Country Garden Services Holdings has net cash of CN¥12.3b, as well as more liquid assets than liabilities. So we are not troubled with Country Garden Services Holdings's debt use. 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. Be aware that Country Garden Services Holdings is showing 2 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. 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.