Is Global Strategic Group (HKG:8007) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Global Strategic Group Limited (HKG:8007) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Global Strategic Group

How Much Debt Does Global Strategic Group Carry?

As you can see below, Global Strategic Group had HK$73.0m of debt at March 2022, down from HK$122.6m a year prior. However, because it has a cash reserve of HK$4.90m, its net debt is less, at about HK$68.1m.

How Strong Is Global Strategic Group's Balance Sheet?

The latest balance sheet data shows that Global Strategic Group had liabilities of HK$85.0m due within a year, and liabilities of HK$64.4m falling due after that. On the other hand, it had cash of HK$4.90m and HK$16.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$127.8m.

This deficit is considerable relative to its market capitalization of HK$132.2m, so it does suggest shareholders should keep an eye on Global Strategic Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Global Strategic Group wasn't profitable at an EBIT level, but managed to grow its revenue by 97%, to HK$111m. 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. To be specific the EBIT loss came in at HK$11m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$5.8m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Global Strategic Group has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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.