Country Garden Services Holdings (HKG: 6098) Using Too Much Debt?
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that Country Garden Services Holdings Company Limited (HKG: 6098) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business 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 flow and debt together.
Check out our latest review for Country Garden Services Holdings
What is the net debt of Country Garden Services Holdings?
As you can see below, at the end of June 2021, Country Garden Services Holdings was in debt of CNN 4.73 billion, up from CNâs 3.39 billion a year ago. Click on the image for more details. However, his balance sheet shows that he has CN 25.1 billion in cash, so he actually has net cash of CN 20.3 billion.
How strong is Country Garden Services Holdings’ balance sheet?
According to the latest published balance sheet, Country Garden Services Holdings had liabilities of 18.7 billion cts due within 12 months and liabilities of 2.38 billion cts due beyond 12 months. In compensation for these obligations, it had cash of CN 25.1 billion as well as receivables valued at CN 8.00 billion maturing within 12 months. So he actually CN Â¥ 12.0b Following liquid assets as total liabilities.
This short-term liquidity is a sign that Country Garden Services Holdings could likely repay its debt with ease, as its balance sheet is far from tight. Put simply, the fact that Country Garden Services Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, Country Garden Services Holdings has grown its EBIT by 64% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Country Garden Services Holdings’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Country Garden Services Holdings may have net cash on the balance sheet, but it is always interesting to consider the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs. in its ability to manage debt. Over the past three years, Country Garden Services Holdings has recorded free cash flow totaling 95% of its EBIT, which is higher than what we normally expected. This puts him in a very strong position to pay off the debt.
As much as we sympathize with investors who find debt worrying, you should keep in mind that Country Garden Services Holdings has net cash of CNN 20.3 billion, plus more liquid assets than liabilities. . The icing on the cake was that 95% of that EBIT was converted to free cash flow, which brought in 3.1b CN. So, is Country Garden Services Holdings’ debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 2 warning signs for Country Garden Services Holdings which you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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