Is Wealth Glory Holdings (HKG:8269) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Wealth Glory Holdings Limited (HKG:8269) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wealth Glory Holdings

What Is Wealth Glory Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Wealth Glory Holdings had debt of HK$12.6m at the end of March 2021, a reduction from HK$18.7m over a year. However, its balance sheet shows it holds HK$28.6m in cash, so it actually has HK$16.0m net cash.

A Look At Wealth Glory Holdings' Liabilities

We can see from the most recent balance sheet that Wealth Glory Holdings had liabilities of HK$30.8m falling due within a year, and liabilities of HK$35.0k due beyond that. Offsetting this, it had HK$28.6m in cash and HK$62.3m in receivables that were due within 12 months. So it can boast HK$60.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Wealth Glory Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Wealth Glory Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wealth Glory 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.

Over 12 months, Wealth Glory Holdings made a loss at the EBIT level, and saw its revenue drop to HK$51m, which is a fall of 24%. To be frank that doesn't bode well.

So How Risky Is Wealth Glory Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Wealth Glory Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$10.0m of cash and made a loss of HK$67m. With only HK$16.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Wealth Glory Holdings (1 shouldn't be ignored) you should be aware of.

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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