Courage Investment Group (HKG:1145) Has A Rock Solid 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.' 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 can see that Courage Investment Group Limited (HKG:1145) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Courage Investment Group

How Much Debt Does Courage Investment Group Carry?

The image below, which you can click on for greater detail, shows that Courage Investment Group had debt of US$5.94m at the end of June 2022, a reduction from US$11.4m over a year. However, its balance sheet shows it holds US$19.5m in cash, so it actually has US$13.6m net cash.

How Healthy Is Courage Investment Group's Balance Sheet?

We can see from the most recent balance sheet that Courage Investment Group had liabilities of US$2.81m falling due within a year, and liabilities of US$4.55m due beyond that. Offsetting this, it had US$19.5m in cash and US$1.54m in receivables that were due within 12 months. So it actually has US$13.7m more liquid assets than total liabilities.

This surplus strongly suggests that Courage Investment Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Courage Investment Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Courage Investment Group grew its EBIT by 288% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Courage Investment Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Courage Investment Group 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. Over the last three years, Courage Investment Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Courage Investment Group has net cash of US$13.6m and plenty of liquid assets. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in US$4.0m. At the end of the day we're not concerned about Courage Investment Group's debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Courage Investment Group 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.