Are GreenTree Hospitality Group Ltd’s (NYSE:GHG) Interest Costs Too High?

The direct benefit for GreenTree Hospitality Group Ltd (NYSE:GHG), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is GHG will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean GHG has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.

View our latest analysis for GreenTree Hospitality Group

Is GHG growing fast enough to value financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either GHG does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. GHG’s revenue growth over the past year is a double-digit 32.2% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.

Can GHG meet its short-term obligations with the cash in hand?

Since GreenTree Hospitality Group doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of CN¥575.4m liabilities, the company has been able to meet these obligations given the level of current assets of CN¥2.18b, with a current ratio of 3.79x. However, anything about 3x may be excessive, since GHG may be leaving too much capital in low-earning investments.

Next Steps:

As a high-growth company, it may be beneficial for GHG to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, GHG’s financial situation may change. This is only a rough assessment of financial health, and I’m sure GHG has company-specific issues impacting its capital structure decisions. I suggest you continue to research GreenTree Hospitality Group to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for GHG’s future growth? Take a look at our free research report of analyst consensus for GHG’s outlook.
2. Valuation: What is GHG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GHG is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at [email protected].