Yahoo Finance Does GreenTree Hospitality Group (NYSE:GHG) Have A Healthy Balance Sheet?
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. We note that GreenTree Hospitality Group Ltd. (NYSE:GHG) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for GreenTree Hospitality Group
How Much Debt Does GreenTree Hospitality Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 GreenTree Hospitality Group had CN¥70.0m of debt, an increase on CN¥60.0m, over one year. However, it does have CN¥817.0m in cash offsetting this, leading to net cash of CN¥747.0m.
How Strong Is GreenTree Hospitality Group's Balance Sheet?
According to the last reported balance sheet, GreenTree Hospitality Group had liabilities of CN¥721.7m due within 12 months, and liabilities of CN¥993.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥817.0m as well as receivables valued at CN¥294.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥602.8m.
Of course, GreenTree Hospitality Group has a market capitalization of CN¥9.25b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, GreenTree Hospitality Group boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that GreenTree Hospitality Group's load is not too heavy, because its EBIT was down 35% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if GreenTree Hospitality Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. GreenTree Hospitality 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. Over the most recent three years, GreenTree Hospitality Group recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
We could understand if investors are concerned about GreenTree Hospitality Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥747.0m. And it impressed us with free cash flow of CN¥73m, being 71% of its EBIT. So we are not troubled with GreenTree Hospitality Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for GreenTree Hospitality Group you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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