We Think Country Garden Services Holdings (HKG:6098) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Country Garden Services Holdings Company Limited (HKG:6098) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

View our latest analysis for Country Garden Services Holdings

What Is Country Garden Services Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Country Garden Services Holdings had CN¥1.57b of debt in December 2023, down from CN¥2.25b, one year before. However, its balance sheet shows it holds CN¥13.9b in cash, so it actually has CN¥12.4b net cash.

A Look At Country Garden Services Holdings' Liabilities

According to the last reported balance sheet, Country Garden Services Holdings had liabilities of CN¥26.4b due within 12 months, and liabilities of CN¥4.08b due beyond 12 months. Offsetting these obligations, it had cash of CN¥13.9b as well as receivables valued at CN¥18.6b due within 12 months. So it actually has CN¥2.09b more liquid assets than total liabilities.

This short term liquidity is a sign that Country Garden Services Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Country Garden Services Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Country Garden Services Holdings if management cannot prevent a repeat of the 57% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Country Garden Services Holdings'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. Country Garden Services Holdings 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. Over the most recent three years, Country Garden Services Holdings recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Country Garden Services Holdings has CN¥12.4b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in CN¥3.7b. So we are not troubled with Country Garden Services Holdings's debt use. 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. Be aware that Country Garden Services Holdings is showing 3 warning signs in our investment analysis , you should know about...

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.