Would Glory Flame Holdings (HKG:8059) Be Better Off With Less 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.' 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 can see that Glory Flame Holdings Limited (HKG:8059) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 image below, which you can click on for greater detail, shows that at December 2020 Glory Flame Holdings had debt of HK$64.3m, up from HK$56.3m in one year. On the flip side, it has HK$37.3m in cash leading to net debt of about HK$27.0m.

How Strong Is Glory Flame Holdings' Balance Sheet?

The latest balance sheet data shows that Glory Flame Holdings had liabilities of HK$94.5m due within a year, and liabilities of HK$9.69m falling due after that. On the other hand, it had cash of HK$37.3m and HK$71.8m worth of receivables due within a year. So it can boast HK$4.87m more liquid assets than total liabilities.

This surplus suggests that Glory Flame Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But it is Glory Flame Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Glory Flame Holdings had a loss before interest and tax, and actually shrunk its revenue by 13%, to HK$81m. That's not what we would hope to see.

Caveat Emptor

While Glory Flame 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. Its EBIT loss was a whopping HK$10m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. 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. We've identified 2 warning signs with Glory Flame Holdings , 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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