These 4 Measures Indicate That Goal Rise Logistics (China) Holdings (HKG:1529) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Goal Rise Logistics (China) Holdings Limited (HKG:1529) does carry debt. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, 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 June 2021 Goal Rise Logistics (China) Holdings had CN¥10.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥71.7m in cash, so it actually has CN¥61.7m net cash.

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¥49.3m due within 12 months and liabilities of CN¥7.67m due beyond that. Offsetting these obligations, it had cash of CN¥71.7m as well as receivables valued at CN¥68.7m due within 12 months. So it can boast CN¥83.4m more liquid assets than total liabilities.

This surplus strongly suggests that Goal Rise Logistics (China) Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 79% in the last twelve months. 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 you can't view debt in total isolation; since Goal Rise Logistics (China) Holdings will need earnings to service that debt. 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 82% 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 we empathize with investors who find debt concerning, you should keep in mind that Goal Rise Logistics (China) Holdings has net cash of CN¥61.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥3.8m, being 82% of its EBIT. So we are not troubled with Goal Rise Logistics (China) Holdings's debt use. 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 learn about the 3 warning signs we've spotted with Goal Rise Logistics (China) Holdings (including 1 which doesn't sit too well with us) .

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.