We Think Glory Flame Holdings (HKG:8059) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Glory Flame Holdings Limited (HKG:8059) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Glory Flame Holdings

What Is Glory Flame Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Glory Flame Holdings had HK$64.3m in debt in June 2021; about the same as the year before. However, because it has a cash reserve of HK$42.2m, its net debt is less, at about HK$22.0m.

A Look At Glory Flame Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Glory Flame Holdings had liabilities of HK$97.8m due within 12 months and liabilities of HK$9.29m due beyond that. On the other hand, it had cash of HK$42.2m and HK$42.4m worth of receivables due within a year. So its liabilities total HK$22.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Glory Flame Holdings has a market capitalization of HK$42.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Glory Flame 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 Glory Flame Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to HK$100m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Glory Flame Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$6.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$13m into a profit. In the meantime, we consider the stock very risky. 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. We've identified 3 warning signs with Glory Flame Holdings (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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