Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Goal Rise Logistics (China) Holdings Limited (HKG:1529) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Goal Rise Logistics (China) Holdings
What Is Goal Rise Logistics (China) Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Goal Rise Logistics (China) Holdings had CN¥10.0m of debt, an increase on none, over one year. However, it does have CN¥75.0m in cash offsetting this, leading to net cash of CN¥65.0m.
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. Offsetting these obligations, it had cash of CN¥75.0m as well as receivables valued at CN¥70.5m due within 12 months. So it can boast CN¥51.7m more liquid assets than total liabilities.
This surplus liquidity suggests that Goal Rise Logistics (China) Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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!
Shareholders should be aware that Goal Rise Logistics (China) Holdings's EBIT was down 61% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is Goal Rise Logistics (China) Holdings'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, a company can only pay off debt with cold hard cash, not accounting profits. While Goal Rise Logistics (China) 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. Over the last three years, Goal Rise Logistics (China) Holdings recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
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¥13m, being 83% of its EBIT. So we don't have any problem with Goal Rise Logistics (China) Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Goal Rise Logistics (China) Holdings .
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. 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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