Country Garden Services Holdings (HKG:6098) Has A Rock Solid Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Country Garden Services Holdings Company Limited (HKG:6098) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Country Garden Services Holdings

How Much Debt Does Country Garden Services Holdings Carry?

The image below, which you can click on for greater detail, shows that Country Garden Services Holdings had debt of CN¥1.86b at the end of June 2022, a reduction from CN¥4.73b over a year. But on the other hand it also has CN¥13.1b in cash, leading to a CN¥11.3b net cash position.

How Strong Is Country Garden Services Holdings' Balance Sheet?

The latest balance sheet data shows that Country Garden Services Holdings had liabilities of CN¥23.8b due within a year, and liabilities of CN¥3.92b falling due after that. Offsetting these obligations, it had cash of CN¥13.1b as well as receivables valued at CN¥16.3b due within 12 months. So it actually has CN¥1.77b 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. Simply put, the fact that Country Garden Services Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Country Garden Services Holdings grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 69% 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 we empathize with investors who find debt concerning, you should keep in mind that Country Garden Services Holdings has net cash of CN¥11.3b, as well as more liquid assets than liabilities. And we liked the look of last year's 39% year-on-year EBIT growth. So is Country Garden Services Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Country Garden Services Holdings is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.