Is Golden Power Group Holdings (HKG:3919) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Power Group Holdings Limited (HKG:3919) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Golden Power Group Holdings

How Much Debt Does Golden Power Group Holdings Carry?

The chart below, which you can click on for greater detail, shows that Golden Power Group Holdings had HK$225.8m in debt in June 2023; about the same as the year before. However, because it has a cash reserve of HK$72.4m, its net debt is less, at about HK$153.4m.

A Look At Golden Power Group Holdings' Liabilities

The latest balance sheet data shows that Golden Power Group Holdings had liabilities of HK$313.3m due within a year, and liabilities of HK$35.3m falling due after that. Offsetting this, it had HK$72.4m in cash and HK$47.8m in receivables that were due within 12 months. So it has liabilities totalling HK$228.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$37.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Golden Power Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Golden Power Group Holdings'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.

In the last year Golden Power Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 13%, to HK$290m. That's not what we would hope to see.

Caveat Emptor

While Golden Power Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$5.2m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated HK$1.5m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Golden Power Group Holdings (of which 4 are a bit concerning!) 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.

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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.