Is Goal Rise Logistics (China) Holdings (HKG:1529) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Goal Rise Logistics (China) Holdings Limited (HKG:1529) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Goal Rise Logistics (China) Holdings

How Much Debt Does Goal Rise Logistics (China) Holdings Carry?

As you can see below, at the end of December 2020, Goal Rise Logistics (China) Holdings had CN¥10.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥75.0m in cash, leading to a CN¥65.0m net cash position.

How Strong Is Goal Rise Logistics (China) Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Goal Rise Logistics (China) Holdings had liabilities of CN¥56.8m due within 12 months and liabilities of CN¥37.0m due beyond that. On the other hand, it had cash of CN¥75.0m and CN¥79.9m worth of receivables due within a year. So it can boast CN¥61.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Goal Rise Logistics (China) Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Goal Rise Logistics (China) Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Goal Rise Logistics (China) Holdings's EBIT fell a jaw-dropping 60% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is Goal Rise Logistics (China) Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Goal Rise Logistics (China) 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 last three years, Goal Rise Logistics (China) Holdings recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Goal Rise Logistics (China) Holdings has CN¥65.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥18m, being 91% of its EBIT. So we don't think Goal Rise Logistics (China) Holdings's use of debt is risky. 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. We've identified 3 warning signs with Goal Rise Logistics (China) Holdings , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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