Is Global Strategic Group (HKG:8007) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Global Strategic Group Limited (HKG:8007) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Global Strategic Group

What Is Global Strategic Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Global Strategic Group had HK$93.9m of debt in September 2021, down from HK$126.2m, one year before. However, it also had HK$23.4m in cash, and so its net debt is HK$70.5m.

A Look At Global Strategic Group's Liabilities

The latest balance sheet data shows that Global Strategic Group had liabilities of HK$99.6m due within a year, and liabilities of HK$73.0m falling due after that. Offsetting this, it had HK$23.4m in cash and HK$18.3m in receivables that were due within 12 months. So its liabilities total HK$130.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$136.8m, so it does suggest shareholders should keep an eye on Global Strategic Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Global Strategic Group 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.

Over 12 months, Global Strategic Group reported revenue of HK$71m, which is a gain of 67%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Global Strategic Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$23m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$4.5m of cash over the last year. So to be blunt we think it is risky. 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. We've identified 4 warning signs with Global Strategic Group (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.