Despite Lacking Profits Golden Ponder Holdings (HKG:1783) Seems To Be On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Golden Ponder Holdings Limited (HKG:1783) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company 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 and debt together.

View our latest analysis for Golden Ponder Holdings

What Is Golden Ponder Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Golden Ponder Holdings had debt of HK$45.7m, up from none in one year. But it also has HK$124.5m in cash to offset that, meaning it has HK$78.8m net cash.

A Look At Golden Ponder Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Golden Ponder Holdings had liabilities of HK$215.0m due within 12 months and liabilities of HK$12.7m due beyond that. Offsetting these obligations, it had cash of HK$124.5m as well as receivables valued at HK$160.6m due within 12 months. So it actually has HK$57.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Golden Ponder Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Golden Ponder Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Golden Ponder Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Golden Ponder Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 82%, to HK$634m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Golden Ponder Holdings?

While Golden Ponder Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$24m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 82% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Golden Ponder Holdings (including 2 which are a bit unpleasant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.