Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. As with many other companies Golden Throat Holdings Group Company Limited (HKG:6896) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Golden Throat Holdings Group's Debt?
As you can see below, at the end of June 2019, Golden Throat Holdings Group had CN¥355.3m of debt, up from CN¥101.0m a year ago. Click the image for more detail. But it also has CN¥744.4m in cash to offset that, meaning it has CN¥389.1m net cash.
A Look At Golden Throat Holdings Group's Liabilities
The latest balance sheet data shows that Golden Throat Holdings Group had liabilities of CN¥699.3m due within a year, and liabilities of CN¥2.33m falling due after that. Offsetting these obligations, it had cash of CN¥744.4m as well as receivables valued at CN¥378.0m due within 12 months. So it can boast CN¥420.8m more liquid assets than total liabilities.
This luscious liquidity implies that Golden Throat Holdings Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Golden Throat Holdings Group boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Golden Throat Holdings Group grew its EBIT by 91% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Golden Throat Holdings Group'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 company can only pay off debt with cold hard cash, not accounting profits. Golden Throat Holdings Group 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. During the last three years, Golden Throat Holdings Group produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Golden Throat Holdings Group has CN¥389.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 91% over the last year. The bottom line is that we do not find Golden Throat Holdings Group's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Golden Throat Holdings Group (including 2 which is are significant) .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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